Insurance inside super is often the best solution for clients due to the tax and cash-flow benefits. There are however, many different types of insurance inside super – and different ways to structure these policies. According to the Investment Trends 2016 Planner Risk Report, three-quarters of advisers are now using their clients’ platforms to write risk and this article, reproduced with our thanks to IOOF, looks at the reasons for the growth of retail insurance in super.
Group vs retail insurance
Guaranteed renewable/non-cancellable policies. More flexible policy definitions. Life buy-back and longer-term cover. There are many reasons why retail insurance policies inside super may be preferable to ‘one size fits all’ group insurance cover. In fact, the extra features and the shrinking gap between group and retail premiums are providing opportunities for advisers with some retail premium being lower than the group life equivalent inside super or, where the price difference is marginal, offering higher quality cover.
For clients who hold retail insurance inside super there are different ways these features can be accessed – and there can be consequences for their use, particularly at claim time.
Retail insurance in super. What are your options?
There are two main ways clients can hold their retail insurance in super. One method popular since the introduction of SuperStream involves establishing an insurance-only super fund independent of the member’s super fund with the insurer’s trustee owning the policy. Premiums are funded by annual partial rollovers from the member’s regular fund.
This method increases the complexity of insurance arrangements, running counter to the desire of many clients for a simpler financial plan. That’s the belief of IOOF insurance specialist Peter Stathis who warns this approach also increases the risk of an inadvertent policy lapse.
“With insurance cover held in a different super fund the possibility of a lapse is naturally higher. If a member changes jobs and starts contributing to a new super fund, there’s a real risk the original super fund eventually won’t have the funds to cover partial rollover contributions,” Stathis said.
“Also, there are reasons a super fund can legally refuse to process a rollover, such as if the fund balance falls below $5,000, or if a withdrawal has been made in the prior 12 months” Stathis added, “and this may cause a policy to lapse with potentially devastating consequences if a claim event happens down the track.”
Writing risk on platforms
Another approach is to take insurance cover on the client’s regular super fund. This provides the same high quality non-cancellable policy as the stand-alone policy (held as super). However there are advantages:
- Premiums are deducted automatically from the client’s cash account, generally monthly, half-yearly or annually. This reduces the likelihood of an inadvertent policy lapse
- When integrated in a platform, pension options are available, which are not available as stand-alone super-held policies. This means that the Death and TPD benefit received may be converted to a pension account for the beneficiaries or the member
- Reporting and administration is consolidated in one place, with a clear explanation of premiums on the client’s statement
Together with improvements in technology and products, you now have more options to satisfy the best interests’ duty of your clients, and their desire for choice and simplicity. The reasons why more advisers are writing risk on platforms are clear.