Helping a client sort out insurance through their super fund might not be glamorous work, but Bill Buttler says it often turns out to be extremely valuable.
Back in 1975, I started my first permanent job, at the ripe old age of 23.
Within a year, I was married; and by the time my wife and I were 30, most of our friends and work colleagues had followed more or less the same path – two or three kids, and a modest suburban home with a mortgage to match.
Now fast forward to the 21st century. There have been dramatic social and lifestyle changes over the intervening years:
• The median marriage age for males has jumped from just over 23 to just under 30.
• The median age of mothers has increased from 25 to 30.
• The average mortgage size has climbed from 2.5 times to 5.5 times the average annual wage.
‘The default cover provided by super funds…is not going to be adequate in many cases’
The changes in marriage age probably reflect significant changes in social attitudes to marriage and child bearing. Cohabitation and raising children out of wedlock do not hold the same social stigma that applied even as recently as 1975. Even so, it is clear that couples are starting families later – much later.
And while a family dependent on a single breadwinner was still the norm in 1975, it is very likely that, today, it will take two incomes to service that mortgage and put the children through school and beyond.
So what does this all mean for personal financial security? The major consequence of these changes is that we are likely to see an increasing number of people with high life insurance cover needs right through the 40s, 50s and beyond – just when the cost of cover starts to escalate rapidly, and when changing health may impact on the availability of insurance at standard rates.
To illustrate, here are some typical annual premiums for $1 million of life and TPD cover (male, non-smoker, “standard” occupation):
It will become more and more difficult for older parents to cover the premium increase each year as the demands of school and university fees build up. What’s more, both partners in a couple are likely to be contributing to household income and therefore require significant amounts of cover through their middle ages and beyond.
SUPER FUNDS RECOGNISE THE NEED FOR COVER
“Industry super funds” were introduced during the 1980s on the back of the 3 per cent “productivity” superannuation awards, which later morphed into the now universal 9 per cent Superannuation Guarantee entitlement.
The original industry funds incorporated a nominal insurance benefit to ensure that workers’ families would at least have a small capital sum in the event of death or disablement of the wage earner. The initial constraint, almost universal, was that premiums would amount to no more than $1 per week, to ensure that small contributions were not eaten away through the impact of administration fees and insurance premiums. As a consequence, most of these funds originally provided a “unitised” cover scale with a flat dollar cover amount up to (say) age 30, and reducing rapidly beyond age 40. Cover was compulsory, with no occupational rating. Despite the obvious shortcomings, the system has had the benefit that now, almost every Australian worker has life cover of some kind.
Meanwhile, those workers fortunate enough to be members of some public sector funds, and some of the better corporate and retail funds, continued to have access to cover levels linked to their income, at substantially higher levels than the basic cover offered by the industry funds. However, there are more recent signs that the increasing need for cover is influencing the range of benefits offered by industry funds.
Some funds have started to extend the flat dollar unitised cover scales beyond age 30 towards age 50, particularly in the healthcare service industries. There is even a fund that automatically increases life cover by a multiple of four once the fund member reaches age 30.
These are the “default” cover arrangements that apply universally to all members when they join these funds. More dramatic changes have occurred in the area of voluntary additional cover:
• Most funds now offer voluntary additional cover on a “rate for age” basis.
• Many funds offer preferred (lower) rates for clerical and professional occupations.
• More recently, automatic acceptance levels have escalated to $1 million or more. Automatic cover (without provision of evidence of good health) generally applies on first joining the fund, subject to a few simple restrictions (actively at work, some exclusions).
• Furthermore, some funds also offer the same generous automatic cover on a “life events” basis, with the eligible life events being birth of a child, marriage or taking out a mortgage.
• Many funds also offer optional salary continuance or income protection benefits, often under similar automatic acceptance or low-underwriting arrangements.
The premium rates being offered by some funds are very competitive when compared against non-superannuation retail policies.
Of course, the professional planner will be aware of tax differences in the treatment of death benefits paid from super funds; and there are other pros and cons of insurance provided via a super fund versus non-superannuation arrangements.
