News Life and Health28 Jun 2018

Australia:50% fall expected in group life cover in superannuation with opt-in proposal

| 28 Jun 2018

The overall impact of proposed Federal Budget measures on insurance cover in superannuation would be a 50% reduction in group life cover, according to an assessment by global professional services firm KPMG. In addition, a 42% reduction is anticipated in insurance premiums collected.

The Australian government's proposal, announced in the 2018/2019 Federal Budget released in May, will involve moving insurance within superannuation from a default framework to one that is offered on an opt-in basis for:

  • members with low balances of less than A$6,000 ($4,428),
  • members under the age of 25 years, and
  • members whose accounts have not received a contribution in 13 months and are inactive.

The KPMG analysis also highlights other overall likely impacts from the proposed changes, namely:

  • an increase in average group life insurance premiums of 26% across the industry
  • Erosion impact on retirement outcomes

From a retirement outcome perspective, the final impact is subject to the future adjustment to insurance premiums based on the proposed changes. Overall, if insurance premium rates are not increased as a result of these measures, then on average the erosion of projected retirement benefits due to default insurance premiums would reduce from 6.2% to 5.8%. However, if insurance premiums increase by 26% as anticipated, the average level of erosion of projected retirement benefits deteriorates from 6.2% to 7.3%.

  • Disproportionate impact for females and low income earners

The most heavily impacted categories of erosion of benefits due to default insurance cover are females and low income earners. For example, considering an increase in insurance premiums of 26%, KPMG estimates the average erosion of account balances for females will increase from 7.6% to 9.0% and low income earners (

In summary, the impact of the proposed measures is expected to be:

Proposed measures

% reduction in group life cover

Removal of default cover for members with low balances of less than A$6,000

45%

Removal of default cover for members under the age of 25 years

18%

Removal of default cover for members whose accounts have not received a contribution in 13 months and are inactive

46%

Overall impact on insurance cover as a result of the above measures

50%

 

The impact for each superannuation fund will vary significantly due to differences in insurance cover design, member demographic, account balance profile and proportion of inactive members.

The changes are set to take effect on 1 July 2019, with affected superannuation members having a period of 14 months to decide whether they will opt-in to their existing cover or allow it to be switched off.

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