You know that old saying, you get what you pay for.
It holds true in a lot of cases but not when it comes to superannuation and particularly not when it comes to the insurance cover your super fund buys for you.
Your superannuation fund takes out life insurance on your behalf, covering death, injury and often with income protection. But it isn’t free. You pay for it every year on top of all the management fees and charges that are deducted from your savings.
In a great number of cases, it isn’t even cheap.
A recent study by the financial services regulator, the Australian Prudential Regulatory Authority, looked at just how much value workers were getting from their superannuation insurance cover.
The results were alarming.
It discovered that of the 52 retail sector funds it examined, 20 were operated by organisations that also had an insurance division. And in all but one case, those organisations had their related insurance division provide the insurance for superannuation fund members.
The researchers discovered, not surprisingly, that super fund members in those organisations were paying substantially more for their insurance. That wasn’t the worst of it.
Of those funds, 8 had a clause in the overriding trust deed that forced the super fund to use the in-house insurance division. So there was no choice and no competition. The super fund was “bound” to the insurance division.
“Members of bound funds purchase more insurance than their counterparts in non-bound funds,” the study found.
Not only are super fund members in these funds buying more insurance than they need, they paying more for the privilege.
A member of a bound fund pays on average about $252 a year for their insurance. That is “roughly twice the average paid across all other types of funds.” The APRA researchers concluded.
Insurance is the last great area left for the finance industry to gouge commissions. Although the practice has been banned on financial planning and for superannuation investment products, it is still legal with insurance.
Financial planners and sales agents can still cream enormous commissions on insurance, which explains why the premiums on individual life insurance policies are so expensive. A financial planner can earn up to 80 per cent of the first year’s premium as a commission and then a further 30 per cent every year after that.
Big super funds usually are able to obtain life insurance for their members at a significant discount because they buy policies in bulk and so should be able to cut out a lot of the commissions. That should particularly be the case with a superannuation operator that has an in-house insurance business. The cost should be even cheaper.
But where super funds are forced to use their in-house insurance arm, evidence arose of a clear conflict of interest and where once again, when it comes to superannuation, profit for the organisation once again is placed ahead of benefits for the members.