Productivity Commission slams 'zombie' insurance in super

Published 31 May 2018

Insurance policies incorporated into the superannuation funds of many Australians are eroding retirement savings and failing to provide adequate cover, according to a damning new Productivity Commission report.

'Zombie' policies mean people in the country are locked into default insurance through their super, but are ultimately unable to make claims when they fall ill or are injured.

The report said roughly 12 million Australians access life insurance products via their superannuation, with common policies including cover for total and permanent disability (TPD), income protection and critical illness.

However, the commission claimed the average blue-collar worker loses $85,000 from their retirement pot due to insurance erosion - the equivalent of 2.5 years' pay. Employees who have duplicate super accounts from multiple jobs are the worst hit, seeing their pension funds drop by as much as $125,000.

Income protection highlighted as the worst culprit

Superannuation members with income protection were the most likely to encounter 'zombie' policies.

First, income protection can usually only be claimed against one policy, meaning duplicate payments across multiple super accounts were redundant. Second, people cannot claim income protection when they are out of work, yet their premiums are still taken from their super regardless.

The commission estimated that a typical worker's retirement pot shrinks by $60,000 if they have income protection, compared with just $35,000 for those who only have life and disability cover. Meanwhile, roughly 17 per cent of Australians have multiple super accounts, while a staggering one-third of accounts in the country are duplicates.

"With default funds being tied to the employer and not the employee, many members end up with another account every time they change job," said Deputy Chair of the Productivity Commission Karen Chester.

"The excess fees and insurance premiums paid by members on those accounts amount to $2.6 billion every year."

Commission addresses questionable insurance practices

The commission identified a number of other problems relating to insurance within the super sector. These included:

  • Complex and incomparable policies;
  • Poor product tailoring to different demographics;
  • Life and disability bundling, making it difficult to opt out of one without losing both;
  • Inadequate complaint handling; and
  • The substandard application of risk premiums, particularly regarding smoking status and member occupations.

Fortunately, anyone who feels they have been unfairly rejected after making a superannuation insurance claim can pursue legal action. This could lead to a settlement or a court ruling to ensure you receive the benefits to which you are entitled. Please contact Gerard Malouf & Partners Superannuation Lawyers to find out whether you are eligible to make a superannuation claim.

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