With the new financial year started and the Protecting Your Super (PYS) laws now in effect, the Federal Government has turned its attentions to introducing the Putting Members’ Interests First Bill, a set of measures initially intended as part of the PYS legislation but removed from the final Bill.
The PYS changes were among the most significant reforms ever introduced to Australia’s massive superannuation sector, an industry currently said to manage $2.8 trillion in funds. These reforms included such measures as capping low-balance account fees at 3 per cent, the banning of exit fees, and empowering the ATO to consolidate ‘inactive’ super accounts (those that haven’t received a contribution or rollover in the 16 months preceding July 2019).
While the PYS changes have been slated to save Australians up to $1.9 billion in unnecessary insurance premiums through switching off insurance cover on inactive accounts, the Putting Members’ Interests First Bill may take cover away from working Australians actively contributing to their super account. It requires super funds to offer life insurance on an opt-in rather than opt-out basis to members under the age of 25 or with super account balances less than $6,000.
To opt in or out?
In promoting the legislation, Senator Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology, has emphasised the importance of young Australian workers building up their super balances rather than paying premiums for insurance policies on which they are unlikely to claim. But while young Australians are certainly less likely to lodge a claim than older Australians, the inference that life insurance might therefore not be worth having is a questionable one.
The Australian Bureau of Statistics reports that there are currently more than 1.7 million Australians aged under 25 in the workforce, one in four of whom have debt worth at least 75 per cent of their assets. What’s more, around 15% of all births in Australia between 2013 and 2017 were to a mother under the age of 25, and 9% a father under 25 – so to suggest that young Australians don’t have responsibilities worth protecting paints a misleading picture. In the past five years, AIA Australia has paid out more than 1,300 claims to members under 25, amounting to a total claim payment in excess of $110m.
A truly super system
Insurance in super provides millions of Australians and their families with protection and peace of mind in the event of death or disablement. Yet even with the levels of cover currently offered through super, research indicates that underinsurance costs the Australian government about $2 billion each year.
Australia’s group insurance system is regularly lauded as one of the world’s best. By distributing risk within a fund, the model makes it possible for all members to access lower premiums, limited or no underwriting, broader coverage and fewer administration fees. Cover is provided irrespective of age and income, and to workers who would not necessarily qualify otherwise for cover as good at as comparable a rate, such as those working on a casual basis or in high-risk occupations like building or construction.
Perhaps the strongest case for the value of life insurance, however, is how often it goes undervalued. Research recently revealed that up to 40 per cent of Australians under 30 were unaware of what their super balance was, and there have been estimations that less than 10 per cent of those under 25 would be adequately engaged with their super to opt-in to retain their default cover. In this sense, group insurance provides a crucial safety net not only for Australians who wouldn’t otherwise have qualified for insurance, or have been able to afford individual life policies, but who likely wouldn’t get around to purchasing it at all.
Maximising the potential of one’s retirement savings, clearly, is vitally important for the long-term security of every Australian. But it shouldn’t have to come at the expense of protecting their wellbeing in the short-term.
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 Rice Warner, Insurance Administration Expenses, August 2014