Understanding group insurance contracts

“My client has insurance in his super but I don’t know if this protects all the risks I’ve identified.”

How many times have you asked the same question of your BDM or been asked that question by a colleague?

The benefits offered by super funds have continued to improve, driven by trustee recognition of the importance of insurance, member demand and competitive pressures.  The design of their benefits is intended to meet the needs of the average member with some flexibility to tailor for individual circumstances. For many Australians, the only life insurance cover they hold is through the default arrangements in their super fund. It is clearly better for Australians to have some insurance through their super than have no cover at all.

The looming implementation of the Government’s Stronger Super reforms will also focus trustees’ attention on the type of insurance cover they provide to members and the definitions offered. 

In spite of the narrowing gap between group insurance plans in super and individual insurance policies, there remains some fundamental differences.  It is critical that these differences are understood to ensure your recommendations are in the best interest of your clients. Your recommendation could very well include retaining the group cover they have in their super. 

Tom Gordon

National Technical Sales Manager - Product

Copyright © 2013 AIA Australia Limited (ABN 79 004 837 861 AFSL 230043). All rights reserved. This information is intended for financial advisers only and is not for wider distribution. This information is current at the date of distribution and is subject to change. This is general information in summary only, without taking into account the objectives, financial situation, needs or personal circumstances of any individual, and may not be exhaustive. It is not intended as financial, legal, medical or other advice.

Continuation options

Clients with a group plan may find cover ceases when they leave their employer or stop contributing to the super fund.  Often there are limited continuation options, if any, particularly for TPD and income protection cover.   Individual policies continue regardless of change in employment and are fully portable. 

Buy-back and reinstatement

Most group plans will cancel the corresponding life cover when a member claims under a TPD policy as they are linked.  Individual policies typically offer options for the client to reinstate life cover, or trauma cover after a suitable waiting period, after a claim for TPD is paid.  This is particularly effective for trauma cover where the likelihood of claiming again is greater than under a TPD policy.

Guaranteed future insurability

Many individual policies offer a guaranteed future insurability option, which allows the client to use their current state of health to secure the option to buy cover in the future.  

AIA Australia’s Forward Underwriting Benefit (known as FUB) allows clients to increase the type of cover held or take out a new type of cover, e.g. purchase trauma cover when only holding life and TPD cover. 

This option is not available with group plans - members are underwritten at the time they require the cover.
 
Conclusion

The strong competitive nature of the individual insurance market provides clients with many comprehensive products and features to choose from.  Those shopping around are faced with many decisions including the suitability of various ownership structures, funding options, sums insured and much more.

Understanding the strengths and weaknesses of group plans and individual policies will help you recommend the most appropriate risk solutions for your clients.

Types of cover offered

The Stronger Super reforms from July 2013 will limit super funds to offering cover for:

• Death
• Terminal illness
• Total and permanent disablement (TPD); and
• Income protection

Trauma and Business Expenses cover can not be offered.

Ownership

Polices in super must be owned by the trustee, meaning that a benefit can only be paid if the trustee is satisfied that a condition of release has been met.  This is straight forward in the case of most death and terminal illness claims, but can be more problematic for some types of TPD claims, particularly ‘own occupation’.  In comparison, individual policies can be owned by the life insured, a business entity, or a super fund trustee.
 
Types of premiums

The following table outlines the typical differences between how individual and group premiums can be paid:

Automatic acceptance

This is the area that drives much of the cost difference between group plans and individual policies.  Leveraging the advantages of size and scale, most group plans offer automatic acceptance with opt-out or have opt-in options within a defined period of joining the fund.  Lower acquisition costs as a result of limited or no underwriting is reflected in lower premium rates of group plans, although cover is not typically as comprehensive.

TPD

Linking TPD and life cover - Many group plans don’t allow the flexibility of standalone TPD cover or the value of TPD cover to be greater than the life cover.  Many default arrangements link the value of life and TPD cover so an increase or reduction in one results in the same change in the other.

Definitions - Individual policies offer a greater choice of TPD definitions, such as ‘any’ or ‘own’ occupation, ‘home duties’ and ‘all duties’.  Group plans are generally limited to the ‘any occupation’ definition, driven by the need to align with superannuation condition of release and overcome concerns that benefits may be trapped in super.  The Government’s Stronger Super reform proposes to ban definitions, such as ‘own occupation’ TPD in super, as this could trap benefits in super.

Income protection