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Does group insurance need to be sold and not bought?

The old adage that life insurance is sold not bought has been derided for some time, but with increased pressure on the value of default superannuation group life insurance to members, perhaps it is time for a more robust selling of the values of life insurance - particularly for younger fund members.

In strict terms the payment of regular insurance premiums depletes retirement savings in superannuation accounts. Latest research from Rainmaker estimates that the average 40-year-old white collar worker pays $150 in annual premiums for cover which represents 0.15% of the average balance or 2% of average contributions.

So the logical question is: "Why should I pay this amount when I see no value? Let me opt-out quickly and easily."

By the same rationale, should one also be able to opt-out of the superannuation guarantee? The answer to the latter is commonly no, as the compulsory nature of the SG creates a system that is good for all and provides a retirement lifestyle. So while the delayed benefit of saving incrementally for retirement doesn't resonate enough for many to make the active decision, the worth or value of the contribution is deemed important enough to compel (i.e., it is considered to be in the national interest).

So what is different between SG and opt-out life insurance? There is an opt-out clause to allow people to contribute to life cover. And there are calls to make this opting-out process easier and more streamlined.

But life insurance has more than one similarity with superannuation savings:

  • Both relate to putting aside cashflow now for a future intangible benefit 
  • Both are complex
  • The benefit for both are realised at a time or occasion that fails to excite on the upside - think retirement or death or the occurrence of disability
  • And finally there is collective societal benefit in the existence of broad take up of the product. Society under insurance can have dramatic and volatile impacts on the lives of individuals and their families.

However while much has been made for the value of having a retirement income from super, not as much has been promoted on the value of insurance. This is most pronounced for younger members of funds where the benefits are more time remote.

Yet for younger members of superannuation funds market trends have been their friend.

Firstly the number of rating factors and price differentiation has increased across products. There are less and less funds that charge a single rate and/or a single cover across all ages and genders and occupations. This had the effect of reducing cross subsidisation within the pool of members. Or put another way, you are more likely to pay for what you get. If a member is higher risk, that means although they will pay more, they are also more likely to make a claim.

Secondly there has been a higher gradient in adapting default levels of cover across age groups. The default cover allotted to younger members in particular has dropped markedly, reflecting their lower needs.

And thirdly, there has been more separation in the default cover given for death as opposed to Total and Permanent Disability (TPD). So for younger members with less dependents and financial commitments, many funds have decreased death cover relative to TPD cover.

The combination of these changes in themselves does not mean that everyone should take up the default cover. However they do mean that the offering is more targeted to the generic needs of different market cohorts, and the price more accurately reflects risk. All this means better value.

The question following this is how best to communicate this better value, especially with potential moves to make opting out more streamlined? Clearly the decision to take up insurance or not is best based on an understanding of the complex nuances and delayed benefit.

This is where an informed understanding of the benefit forgone by opting-out serves all parties well.

A lot of work has been done to focus and mass customise the value of a super fund's insurance cover. How superannuation funds, as the distributor of the life product, sells this benefit is critical. Being sold something rather than buying something is not inherently abhorrent if it is not unduly motivated and is supported by facts.  Insurance is a choice, and an informed choice is best.

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