Life insurance fees slash into super savings

A quarter of super fund members are having their savings whittled away by fees for unwanted life insurance.

Insurance sold in super has short-changed some workers as much as $600,000.

A quarter of superannuation fund members are having their savings whittled away as trustees charge fees for unwanted life insurance on idle and forgotten super funds where members have made no contributions over the past 12 months.

In some cases insurance sold in super has been found to have short-changed some workers as much as $600,000 by the time they reach retirement, according to a report by prominent actuarial firm Rice Warner.

The Rice Warner figures, obtained by The Weekend Australian, come as life insurers and superannuation funds are seeking to head off a regulatory crackdown in the sector by confronting the large fees being charged for mandatory life insurance sold inside funds.

The retirement savings sector is facing fierce political and regulatory pressure following a string of life insurance scandals, insurance premium increases and high fees that have eroded consumer confidence.

The Rice Warner figures also show that sky-high increases in insurance rates are likely to continue, despite an average premium rise of 215 per cent for death and total and permanent disability cover over the past four years. Income protection rates have risen a cumulative 82 per cent over the past four years.

The prudential regulator APRA is currently urging insurers to restore the community’s faith in the business amid unstable profitability, while a parliamentary inquiry is examining allegations of poor claims handling and other high-profile failings across the sector.

The Weekend Australian can reveal the industry-backed Insurance in Superannuation Industry Working Group is preparing to announce reforms aimed at improving insurance for young fund members and for those who are being charged for insurance through more than one default fund. The working group has representatives from the ­Financial Services Council, Industry Super Australia and the Association of Superannuation Funds of Australia.

“Super funds and insurers are developing concrete proposals to improve insurance,” working group chairman Jim Minto said.

“We’re prioritising insurance arrangements for younger members and also prioritising where there are members with more than one default super account.

“From our perspective, it’s critical that our insurers and super funds deliver appropriately to members.”

The Rice Warner report reveals a large discrepancy in the rates that super fund members are charged for life insurance products, and found extreme cases like a 21-year-old in a heavy manual occupation who would lose up to 34 per cent of their account balance over their working life due to the high rates being charged for life insurance cover — equal to missing out on an extra $600,000 at retirement.

It is a significant difference and comes at a time when the government is pursuing reforms to help retirees avoid relying on the age pension — the biggest single budgetary cost to tax­payers.

A young white-collar worker was projected to have 21 per cent less at retirement when charged for death, total and permanent disability (TPD) and income protection, compared to a saver who was not charged for any insurance cover.

While the gap is substantially less than for their blue-collar counterparts, it is a significant amount and highlights the large gaps in insurance affordability for different occupation classes.

Due to the compounding nature of investment returns, small variations in savings at the early stages of accumulation can add up to big differences in balances at retirement.

When insurance was first offered through superannuation policies, flat fees were charged for basic benefits. Rice Warner chief executive Michael Rice said that over the past decade funds began risk-rating their own members in a bid to offer white-collar workers more attractive insurance products — a development to the detriment of the blue-collar workforce.

“If someone is going to contribute 2 per cent of their salary to life insurance, then there’s not much savings left when you take out investment fees, premiums and taxes,” Mr Rice said. “It’s got to be about finding the right balance. I don’t think the funds have thought about value for members in insurance.”

Rice Warner found death and TPD cover take about 0.5 per cent of a white-collar worker’s salary. When income protection cover was included, the cost would rise to between 1 per cent and 1.5 per cent of a salary.

For blue-collar workers, death and TPD claimed about 0.8 per cent of a salary, rising to between 1.5 per cent and 2.3 per cent of a salary when income protection was included.

Over a working life, an average white-collar worker would retire with a super balance 10 per cent lower than if they had not been charged for death, TPD and income protection cover. A blue-collar worker would retire with an average balance 15 per cent lower than if they were not charged for any insurance.

Rice Warner analysed data covering 2.7 million super accounts and found that 25 per cent were charged insurance premiums when they had made no contributions to their savings over the past 12 months.