Evolution of disability cover in superannuation

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This paper comprises excerpts from MLC Life Insurance Discussion paper: Evolution of disability in super, February 2024.

The interplay between insurance in superannuation and public schemes such as the National Disability Insurance Scheme (NDIS) and state-based workers compensation underscores the need for a more cohesive approach to disability support. A streamlined system could ensure seamless transitions between private and public support, preventing members from falling through the cracks.

Considering these complexities, a collaborative effort is needed to develop a more equitable and sustainable framework for supporting members with a disability, especially those with mental health-related disabilities. This framework should consider income stream alternatives within superannuation, address the lengthy claim assessment process, and enable interaction between private and public support schemes.

The importance of insurance

Life insurance is key to the history of superannuation, dating back to the 1950s with life insurers providing superannuation products to the public sector. Since the introduction of compulsory superannuation, insurance has remained a key feature of Australia's world-class superannuation system.

Existing legislative settings mandate that superannuation funds provide death and permanent incapacity benefits to most members of a MySuper product by providing automatic Death and Total and Permanent Disablement (TPD) cover, generally provided on an optout basis.

Death and TPD cover provide a base level of protection for members when they are unable to ever go back to work due to injury or illness, or to beneficiaries in the event of a member's death. Through insurance in superannuation, members are typically also able to top up their default cover with additional, underwritten insurance which provides them with tailored insurance for their specific circumstances.

Further to death and TPD, Income Protection (IP) is the third main type of insurance that can be offered through superannuation. It protects members who are unable to temporarily generate an income due to injury or illness and is offered either as a default or tailored product.

Unlike death and permanent incapacity cover, it is not an obligation in law for superannuation funds to provide IP insurance-but it is a key type of insurance for superannuation members. Trustees are becoming less inclined to provide IP cover to members by default and many members rely solely on TPD cover in the case of disability.

Figure 1 on the next page highlights the significance of insurance in superannuation and its role in safeguarding members' retirement balances in the face of unforeseen events such as injury, illness or death. The sheer scale of insurance coverage within superannuation emphasises its critical position in providing financial protection to a substantial portion of the Australian population.