Insurance within super is usually the most cost-effective way for an individual to cover themselves in the event of a mishap. Most super funds typically offer three types of insurance for their members: life cover, total and permanent disability (TPD) and income protection insurance (or salary continuance cover).
Life cover (death cover) pays a lump sum or income stream to beneficiaries upon your death, or in the event of a terminal illness. TPD insurance pays you a benefit if you become seriously disabled and are unlikely to work again. Income protection insurance pays a regular income for a specified period, ranging from two years to five years, or up to a certain age, if you can’t work due to temporary disability or illness.
Recently, the Australian Securities and Investments Commission (ASIC) reviewed the practices of five large super funds that provide default income protection insurance on an opt-out basis to their members, accounting for around 2 million MySuper member accounts.
Overall, ASIC found that most income protection insurance policies contain “offset” clauses, which mean that the insurance benefit is reduced or “offset” if you receive other kinds of income support. This is used as a way to reduce incentives for you to delay your return to work as a result of receiving more income while disabled than when working.
The review also found large variations between super funds in the types of income offset against income protection benefits.
ASIC found that trustees were not proactively giving members clear explanations about when insurance benefits would or would not be paid as a result of offsets. This information is obviously relevant when you’re considering whether to opt out of default income protection insurance, and if you make an insurance claim.
ASIC’s concern isn’t that the offset clauses exist, but that relevant information to explain the clauses was not available in website communications or in welcome packs, and the clauses were only described in technical and legalistic language in insurance guides.
TIP: You can get more information on ASIC’s MoneySmart website about what to look for when considering income protection insurance through super: see https://moneysmart.gov.au/how-life-insurance-works/income-protection-insurance.