Joanna Mather from the Financial Review writes insurance premiums for blue-collar workers can wipe as much as $600,000 from their final retirement balance but white-collar workers fare much better, new research by Rice Warner shows.
At the extreme end, a 21-year-old worker who falls into the “heavy manual” category and joins a fund that charges high premiums is projected to lose up to 34 per cent of their balance, or more than $600,000, compared to somebody who did not take out life and total permanent disability (TPD) and income protection insurance.
White-collar workers who are less prone to being injured or killed at work and therefore pay lower premiums, would end up with a balance 21 per cent, or $382,000, lower than had they had no insurance.
“For most people, the cost of insurance benefits is the same as a reduction in the Super Guarantee contribution of about 1 per cent of salary,” Rice Warner’s analysis says.
“Effectively, the 9.5 per cent contribution rate reduces to about 6.5 per cent of salaries once premiums, fees and taxes are deducted.”
Super funds are legally required to offer life and TPD insurance with their no-frills MySuper products on an opt-out basis.
Most employees are covered under a “group” policy rather than an individual policy, which means the risk is spread over a greater number of people and premiums are therefore generally cheaper.
Calls for an opt-in system are making the industry nervous.
Rice Warner conducted the analysis not because it wants to encourage people to abandon insurance, according to senior consultant Geoff McRae, but to promote a debate about how to make insurance more affordable.
“We strongly believe that it is still a valuable part but there are some examples in the industry where people are probably paying more as a proportion of their super contributions than is a fair share for providing insurance benefits.”
In other words, there are examples where premiums are too high.
“Certainly some people have been saying insurance should be cut out completely,” Mr McRae said.
“Some have said at under 25, others under 30. At the other end of the scale people have said cover should be cut out for every over 55 or over 60.”
Jim Minto, who chairs an industry working group on life insurance in super, said the “group” system began in high-risk occupation areas like building and construction, where it was almost impossible for those workers to get insurance through traditional channels.
“Premiums are higher today in those higher risk areas because the claims are higher,” he said.
Mr Minto said the fact Australia had an opt-out system meant that more people have adequate cover than in many countries.
“I think there are some who argue idealistically and commercially against this life insurance in superannuation model,” he said.
“What we know today however is some changes will be needed to make sure some particular issues and concerns are addressed.”
Rice Warner analysed default weekly premiums for 21 predominantly industry funds. The examples given earlier were for funds with high premiums.
But average premiums also have a material effect on balances.
A 21-year-old in a heavy manual occupation paying average premiums for TPD and IP is projected to have an account balance at retirement of 15 per cent less, or $265,000 less, by the time he or she retires. The same person in a white-collar job would end up with 10 per cent less, or $176,000 less, than if they had forgone insurance.
Rice Warner then modelled the effect of removing premiums at the earlier and latter stages of working life.
“A 21-year-old in a heavy manual occupation with death, TPD and IP insurance could have an additional $200,000 in their account at retirement if insurance cover was restricted to ages 26 to 55,” the analysis says.
The Rice Warner analysis shows large increases in life and TPD premiums in calendar year 2015 for IOOF (Portfolio Service: Personal and Pursuit), MTAA, FIRST Super and Mine Wealth and Wellbeing.
The largest hikes in income protection premiums came from IOOF (Portfolio Service: Personal), HESTA, LGIAsuper and Prime Super (HIP division).
About Shartru Capital group
The Shartru Capital group is an Australian boutique investment and advisory firm. Shartru Capital is a significant investor in a number of businesses including Shartru Wealth Management.
Shartru Wealth Management is the financial advice and licensee business within the Shartru Capital group.
Whether looking for the right investment strategy; advice on superannuation funds – including DIY #Superannuation or Self-Managed Superannuation; personal insurance or how to get started with your first home loan, age care or estate planning – Shartru Wealth Management can help.
We work in partnership with our clients to provide financial advice to help you meet your individual financial goals and objectives. We encourage our customers to build sustainable futures. That’s why we offer financial planning advice to ensure our customers prosper over the long term.
Shartru Wealth Management has licensed representation in Sydney, Newcastle, Belmont, Brisbane, Tasmania, Melbourne & surrounds, Perth and the Sunshine Coast. For a full list of Financial Advisers licensed through Shartru Wealth Management please check out click here
We look forward to welcoming you to Shartru Wealth Management.
Disclaimer: Published by Shartru Wealth Management Pty Ltd. ABN 46 158 536 871 AFSL 422409. The advice is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance