"The group insurance policies through my superannuation tend to be cheaper than the retail policies, but I'm worried that the lower prices come at a trade-off in quality. What are the advantages of the retail policies over group cover?"
- Matthew in Bairnsdale, VIC
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That’s a terrific question.
As we all know it’s common in life to ‘get what you pay for’, but where financial products such as insurance are concerned, that’s certainly not always the case.
For many years group insurance premiums were noticeably less than retail insurance premiums, but in more recent years I’ve observed a narrowing in premiums between the two, and in fact, in several cases I have found retail premiums to be more economical than group insurance premiums.
As you might expect, no two group or retail insurance policies are exactly the same, but there are some common differences between the two. Below is a summary of the more common points of difference, and particularly those where retail insurance offers an advantage over group insurance:
Ownership Options – Most group insurance is ‘owned’ by the employer or superannuation trustee, whereas retail insurance offers multiple ownership options including individual, joint, SMSF and superannuation trustee options. Depending on your circumstances, owning life insurance via superannuation can incur tax of up to 30% on the benefit payment, and owning Total & Permanent Disablement (TPD) insurance via superannuation can incur tax of up to 20% on the benefit payment, both of which may otherwise be avoided under different ownership options. Having greater choice around ownership options and having flexibility to change the ownership option over time can therefore significantly tax payable on benefits.
Renewability – Group insurance is negotiated between the employer or superannuation provider and the insurer, and the terms of the contract are often periodically renegotiated or re-tendered, so it’s possible the terms of the cover may change over time, and possibly for the worse. Retail insurance, on the other hand, generally offer ‘guaranteed renewable’ contracts that aren’t renegotiated or re-tendered over time and they can’t be cancelled whilst the premiums are paid-up.
Premium Types – Most group insurance schemes only offer aged-based or stepped premiums, whereas most retail insurance allows you to select between stepped premiums, level premiums, or a hybrid of the two. Level or hybrid premiums may be particularly beneficial for younger clients who retain cover for the long term as the cumulative premium savings can be significant over the life of a policy.
Indexation – Most group insurance schemes provide ‘age-based’ or ‘unitised’ cover which typically decreases as you get older, whereas most retail insurance allows you to have your cover ‘index’ or increase each year. Indexing ensures the ‘value’ of your cover doesn’t erode over time with the rising cost of living, and it ensures your cover isn’t automatically reduced later in life when you may not want your cover to be reduced, and when you would otherwise find it more difficult to secure additional cover due to age and health history.
Income Protection Definitions – Most group insurance schemes provide a narrow definition to qualify for a benefit that only considers your ability to perform income producing duties, whereas most retail policies provide a broader three-tier definition that considers duties performed, hours worked, and income lost which increases the opportunity to qualify for a benefit.
TPD Definitions – Most group insurance offers more basic TPD definitions such as ‘any occupation’ and ‘activities of daily living (ADL)’, whereas retail insurance offers more comprehensive TPD definitions including ‘own occupation’, and the TPD definition of retail policies generally won’t change due to unemployment whereas the TPD definition of group policies will typically revert to a basic ADL definition.
In addition to the above items, retail insurance policies typically offer larger sums insured, longer expiry ages, more income protection waiting period and benefit period options, as well as certain other valuable features such as claims indexation (so the value of income protection payments keeps pace with inflation) and life buy-back options (which allows you to ‘buy-back’ your life insurance after a survival period after suffering a TPD event).
The good news is, with most retail insurers now able to have their premiums paid by partial rollover from most superannuation funds, gone are the days of having to ‘bundle’ insurance and superannuation with the one provider, and you can now mix and match the best superannuation and insurance providers to suit your needs.
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