Insurance opt-out has advantages

Superannuation fund members, especially those with multiple funds, will benefit from the government’s proposal to allow fund members to opt out of compulsory group life insurance coverage provided by their funds. This proposal is being resisted by some funds on the basis that allowing members to opt out will increase the premiums for coverage by 10 per cent or more.

Nevertheless, lowering the cost of group insurance coverage by enforcing it for those not wanting it cannot be justified when the cost of the coverage is borne by members. The situation is different for some employer-sponsored funds where an employer covers the cost of the insurance.

Group life insurance covering many people is a sensible and cost efficient way of obtaining essential life and disability protection. It minimises the selling and administration costs of obtaining and providing the cover. But forcing all fund members to take out and pay for a minimum level of coverage penalises thosewho don’t want or need the cover.

The government’s action was in response to criticism of how much the cost of compulsory insurance reduces the size of small super accounts, particularly of part-time and casual workers. The cost of insurance and fund management fees can quickly erode small super account balances

The compulsory super arrangements which have resulted in many people having multiple small accounts haven’t helped. The level of insurance coverage required doesn’t vary with the number of superannuation funds an employee may have.

There’s a serious issue resulting from the fact many Australians have inadequate insurance cover to protect themselves and their families in the event of death or disability. But the compulsory cover in many funds is pitched at levels inadequate to cover the costs of serious events.

At a personal level, even though it involves additional cost and effort, obtaining the required amount of death and disability insurance in a superannuation fund is a beneficial strategy.

The cost of the coverage available in many funds is highly competitive and the big advantage is that the premiums are paid out of superannuation fund assets.

Unlike with most other outlays, the returns for having insurance are intangible and may never result in a pay-out. But unless the government wants to compel taxpayers to take out death and disability insurance cover, there’s no justification for any super fund being allowed to force fund members to pay for coverage they think they don’t want.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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