Clients who opt to rely on group life insurance policies need to fully understand the pros and cons of paying premiums from their super fund balance and the effect of variables such as waiting periods, according to a Rice Warner report released last week.
The Group Claims Experience Study reviewed 16 superannuation funds spanning the industry, public, and retail funds universe, capturing more than 40 per cent of the total group life market.
It found that there was a 68 per cent higher incidence of claimants on 30-day waiting periods returning to work within 12 months than for those on 90-day waiting periods.
“If there’s a 30 day waiting period, they’re obviously more likely to be notifying of the claims earlier, and can then start rehabilitation when it’s useful, whereas even if starting rehab after 90 days, there’s a lot less chance of them going back to work quickly, or in fact at all,” says Geoff McRae, senior consultant, Rice Warner.
Save for retirement, or pay for cover
“The 30 day waiting period is generally a lot more expensive than 90 day, so it’s a toss up of whether you get the better cover, which will cost you more, or go for the cheaper cover – in which case you would be putting more into retirement savings.
“You can’t have it both ways. And there is now, under MySuper, quite a deal of focus on life insurance not unduly reducing people’s retirement income, all the funds are focusing on that, [members] have to be aware of cost,” he says.
According to McRae, 90-day waiting periods are more commonly selected by white-collar workers, with blue-collar workers more likely to opt for a 30-day waiting period.
This also points to the important role good cashflow and budgeting practices play in determining whether a 30- or 90-day waiting period is most appropriate for an individual.
“Often, a professional employee will be in a better position to have the money put aside, so they can afford to maintain their family for three months while waiting out a waiting period, whereas the average blue collar worker isn’t going to have the money set aside, so the 30 day is often a better option.
“The white collar workers tend to go for the 90 day and save the money on the premiums, especially the ones who have sought financial advice,” McRae says.
The study also found long-term income protection claimants who notify of illness or disability within the first six months are 40 per cent more likely to return to work within a year than those who wait longer to lodge a claim.
“It sounds surprising [that people would wait] but that does happen. [We don’t know] whether there’s another breadwinner in the family, or they’re claiming social security benefits, but certainly they were not claiming on the policy…there’ll be workers compensation there in some cases too, of course,” McRae says.
He says that while individual funds and insurers have been aware of these phenomena for some time, “this is the first time it’s been looked at across the whole of the group life business.
“Insurers have seen this from their own insurance with particular funds, so this is just confirming something that people have seen [in] a number of examples.”
The study also looked at TPD claims, but McRae says the numbers here weren’t as clear. “There’s not as much use of rehab for these [policy types], but certainly, likewise…there did seem to be a greater incidence of some recovery [where there were shorter waiting periods].
