Income protection insurance in super: beware of offsets
In Australia, around seven of the 20 largest MySuper products provide default income protection insurance on an opt-out basis. While income protection insurance has the advantage of providing a regular income for a specified period of time if a person cannot work due to temporary disability or illness, a recent ASIC review into this type of cover in super has raised concerns around the amount of information given to members – in particular communication about “offset clauses”, which are often described in technical and legalistic language.
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 the insurance holder’s death, or in the event of a terminal illness. TPD insurance pays the holder a benefit if they 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 the holder can’t work due to temporary disability or illness. It is estimated that seven out of the 20 largest MySuper products provide default income protection insurance on an opt-out basis, and approximately 3.4 million MySuper accounts have income protection insurance.
Recently, 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 as at June 2021. From that review, the regulator has raised various concerns around the amount of information received by members on these policies and whether funds should be doing more to communicate clearly about insurance.
Overall, the review found that most income protection insurance policies contain “offset” clauses, which mean that the insurance benefit is reduced or “offset” if the individual receives other kinds of income support. This is used as a way to reduce incentives for individuals to delay their return to work as a result of receiving more income while disabled than when working. In addition, the review found there were large variations between super funds in the types of income that were offset against income protection benefits.
For example, different funds will offset different combinations of alternative income such as paid leave (annual or long service), employer super contributions, social security benefits, TPD benefits, workers compensation, and other insurance settlement or benefits.
ASIC found that trustees were not proactively giving their members clear explanations about when insurance benefits would or would not be paid as a result of offsets. This information is obviously relevant to members considering whether they should opt out of default income protection insurance, and to those making insurance claims.
ASIC’s concern is not that these offset clauses exist, but rather 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.
The regulator is also concerned that super fund trustees were unable to demonstrate that they had sought reliable data on offsets and used it to review the appropriateness of their default income protection insurance offering. This could cause unnecessary erosion of super benefits of members if offsets mean that particular groups of members get little value from their default insurance if they need to claim.
Super fund members can get more information on ASIC’s MoneySmart website about what to look for when considering income protection insurance through super, at https://moneysmart.gov.au/how-life-insurance-works/income-protection-insurance.