Super Cover A Hidden Concern

Sun Herald

Sunday September 21, 2008

Penny Pryor

An insurance collapse could have broad effects.

IT WASN'T just the AIG policy holders that breathed a sigh of relief when the US Fed announced the bailout package for one of the largest insurers in the world last week.

Besides the direct AIG insurance holders there was another issue waiting in the wings and that was the holders of insurance policies via their superannuation funds.

To avoid what would have been the biggest collapse in history, the Fed extended a loan of $US85 billion ($107 billion), giving it a 79.9 per cent stake in the bank and effectively nationalising it.

AIG has more than 2 million policies in Australia through super funds alone. These include policies for the 1.7 million members of REST Superannuation; more than 500,000 members in BT Lifetime Super and BT Business Super; and 200,000 members of Health Super.

You may have been aware that your superannuation fund is required to provide you with some basic, or default, insurance.

If you have dependents then this offers you the alternative of cover without the immediate cost of premiums because they are deducted from your pre-tax superannuation dollars. While there is no impact on your cash flow there will be a small reduction in your retirement savings dollars.

Many large superannuation funds, especially industry funds, have been improving the insurance offerings they provide to members via new negotiations with their insurance providers, such as AIG.

The average level of death cover industry superannuation members have is $189,000 and the average level of TPD cover (total and permanent disability) is $162,000. This is much more than it used to be but is still not the 10 times annual earnings that insurance pundits say you need to be covered for.

Cover inside superannuation is obviously better than no cover at all but there are some caveats and these are mostly at the claiming end. If your nominated dependents are not tax dependents i.e. spouses or young children, then they could be up for tax on the payout. Also you need to make binding nominations for your dependents and update these every three years to make sure that the insurance money will go to your intended recipients. If you don't your superannuation trustee may exercise its discretion when deciding who should receive your payout. There will also be a slight delay before you receive the insurance money as it needs to be released to the fund and then to the member.

Then last week we had the problem of what might happen if an insurer goes broke. While direct holders of policies would probably lose all cover, there could be even bigger ramifications on a superannuation fund if its insurance provider collapsed. Depending on the agreement between the superannuation trustee, the insurer and the members, the trustee board could have been liable for the insurance cover which would have had a knock-on effect on every member as claims would have had to have been taken from their retirement savings. Just imagine what impact that would have had on superannuation fund balances that have just had the worst year in their 16-year history.

© 2008 Sun Herald

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