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How super funds gave non-smokers a raw deal

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Several superannuation funds were pinged for wrongly classifying more than 156,000 new members as smokers. Yet not all super funds have offered compensation.

Up to January this year, there was a practice at some super funds to classify all new default members as smokers for their respective life insurance policy. This practice was not openly disclosed, leaving members in the dark, and if they didn't opt out, they would end up paying higher life insurance premiums when it was unwarranted.

Across the seven super businesses caught by ASIC, each has now ceased the practice. ASIC says the practice was common when members who changed employers, transferred to a personal super plan from their employers' plan.

the cost of smoking

As at August 7, some members were yet to be moved into non-smoker rates for their life insurance policy, ASIC says.

AMP, Colonial First State (CFS), Equity Trustees, IOOF (including OnePath), Intrust, Netwealth and Suncorp were the super businesses caught by ASIC. Of these seven super funds, CFS, Equity Trustees, Intrust and Netwealth have agreed to pay $3.6 million in compensation to 5000 members - while Suncorp, IOOF and AMP are yet to commit to remediating members.

ASIC Commissioner Danielle Press says that, generally, insurance premiums for smokers are substantially higher than for non-smokers. She says that given the low prevalence of smoking among Australian adults, automatically classifying members as smokers for life insurance offered through super (unless the member takes active steps to confirm non-smoking status) is contrary to community expectations.

"Insurance in super is complex. Many Australians may not realise that default classifications can impact the price of their cover and, therefore, reduce their retirement benefits," says Press.

"In light of the low smoking rate, merely providing disclosure and putting the onus on members to act is not enough to support good member outcomes.

"Those [super] trustees that have committed to remediation are heeding the lessons of the financial services royal commission - that trustees should seek to achieve outcomes for members in line with community standards and expectations," she says.

Press says life insurance in superannuation generally offers quality coverage at a competitive price, but members need to be sure they're not being disadvantaged due to disengagement or inertia.

She says if you believe you have been inappropriately classified as a smoker, approach your super fund in the first instance. If you have a complaint, then contact the Australian Financial Complaints Authority (AFCA) for fair, free and independent dispute resolution.

The news comes at a time when the life insurance industry is campaigning for the federal government to exercise caution when developing new laws in the sector. The industry says that to address Australia's underinsurance issues, there needs to be thought given as to how life insurance and financial advice can become more affordable.

A report commissioned as part of the Choice & Access to Life Insurance (CALI) campaign found that most Australians believe adequate life insurance is enough to secure an "existing quality of life", and to enable people to "reset" after a negative life event.

CALI says significant demographic pockets of underinsurance are already emerging, with one in five younger Australians aged 25-35 considered underinsured compared to community expectations. The same can be said for middle-aged Australians (35-44).

Most ordinary Australians cannot afford to pay an upfront fee for financial advice, and, if trends continue, may not be able to access a financial adviser to help them identify their life insurance needs, says CALI.

"On the current trajectory, within three years, only the wealthiest 15% of Australians will be able to access life insurance with personal advice," says CALI.

"Underinsured people risk leaving their dependants facing severe financial hardship, if they prematurely die or become unable to work."

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Darren Snyder is the managing editor of Money magazine. He is a former editor of Financial Standard, where he had worked as a journalist, predominantly covering superannuation. Previously a mining and wine industry reporter at the Mudgee Guardian, Darren was awarded the Sir Harry Budd Memorial Award for Australian Country Journalism in 2012.
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