The cost of insurance through super is about to jump by up to 20%
It is official.
Young people have been ripped off by their superannuation funds and their insurers by paying three times their true insurance premiums and cross-subsidising older members, according to a report by actuarial consultant Rice Warner.
Insurance costs for 18- to 25-year-olds, together with fund fees, erode small super balances. Part-time workers and students working in holiday periods commonly have their funds reduced to almost nothing - or even nothing in some cases.
Happily, the federal government has taken steps to reduce this erosion of savings. From July 1, 2019 fund members under 25 will be required to opt into life cover, rather than opt out.
So, too, will members with balances under $6000 and those with an account that has been inactive for more than 13 months.
But the end of this cross-subsidisation by young members to reduce the premiums of older members means that premiums are forecast to jump on average by a whopping 11% or all members from July 1, 2019.
If you have income protection insurance through your super fund, you will face a 20.4% increase while death and TPD cover will rise on average by 7.4%.
Rice Warner points out that the premium increases will vary considerably from fund to fund, depending on the demographics of the membership and the changes to terms and conditions to deal with switching cover on and off as well as the benefit design.
Also the increases will not be uniform across the market but depend on the extent of cross-subsidisation of existing premium rates across the membership, the proportion of insured members who are inactive, the proportion with balances under $6000 and the proportion of members under 25.
Rice Warner says that industry super funds typically have the largest level of cross-subsidisation across the ages. Members between 35 and 55 pay premiums that are lower than the true cost and these members have the highest insurance needs and sums insured. Rice Warner says their insurance costs would be expensive without cross-subsidisation.
"It should be noted that while members aged less than 35 are paying more than their true premium, the size of the true premium is quite small and therefore a small absolute dollar increase corresponds to a large percentage rate increase," says Rice Warner.
It estimates that 49% of super fund members will move to an opt-out insurance arrangement from the default, affecting 51% in industry funds, 54% in retail funds and 27% in public sector funds.
Public sector funds are the least impacted by the federal changes as their members are less likely to be inactive, have low balances or be young compared with retail and industry sector members. Retail funds are the most impacted due to the relatively large proportion of low-balance members.
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