Industry funds offer two main benefits for their members, being reduced administration fees on their investments and access to discounted premiums on the insurance cover inside the fund.

This article will focus on the insurance components in the industry funds and the “tips and traps” of these investment plans including:

• What are industry funds and how do they differ from group insurance schemes
• What are the advantages of insurance inside industry funds?
• What are the limitations of insurance inside industry funds?
• How do they compare to an insurance policy offered by an adviser?

What are industry funds and how do they differ from group insurance schemes?

Industry funds are large scale funds generally offered to employer groups and other members. The funds are invested in a strategy depending on the age of the insured.

This strategy can usually be altered at the request of the member. These plans are large scale with minimal client contact, generally sold without financial advice and offer discounted investment administration and insurance premiums.

Group insurance schemes are offered as a benefit of employment with the premiums funded by the employer. As the policy is ultimately owned by the company and not the insured, the employer can cancel and amend cover at their discretion without consulting the members.

Advantages of insurance inside industry funds

As previously stated, industry funds are large scale funds offered to employer groups. The main advantages of insurance inside industry funds are:

• Cost: given the large member base, premiums are offered as “wholesale” or discounted rates. The covers usually expire earlier than regular policies and have a reduced number of additional benefits available to their members.
• No underwriting: Rather than spend time collecting medical information from their members and assessing their individual health risks, the industry funds rely on the employers to hire what they assume are healthy people and cover is offered without the financial burden of medical assessments. The maximum level of cover available without medical underwriting is known as the Automatic Acceptance Limit and set by the super fund depending on the number of employees and industry in which are they are employed.
• Simplicity: Usually arranged by the employer using a specific default level, the insured is provided with a level of cover without completing any health forms or engaging with a financial adviser. This cover can be increased upon application through the superannuation fund. This cover can also be cancelled at any time.

Insurance is generally provided without medical assessments up to a certain limit known as the Automatic Acceptance Limit (AAL). As a general rule, the higher the number of employees insured, the higher the level of cover available.

All cover above the AAL is subject to underwriting which will involve the completion of medical information and potentially involve blood tests. Any health loadings or exclusions can generally only be applied to the cover in excess of the AAL.

Limitations of insurance inside industry funds

The main disadvantages of insurance are:

Basic: The benefit usually contains no “bells and whistles” and cover is often quite limited due to the discounted underwriting and SIS Regulations preventing the client from receiving more than 75% of their pre disability income under a Non Commutable Income stream. The definitions and terms of the product are usually not as favourable when compared to retail insurance policies sold with financial advice

Offsets: Depending on the product selected, the policy may include a number of offsets including sick leave, any other policy and workers compensation entitlements. The policy may also cease if the insured is totally disabled. Furthermore, many older clients may find their cover reducing in later years.

Underinsurance: As no financial advice has been sought, the cover may be insufficient to meet the needs of the client in the event of death. The insurable income reported by the employer may not include bonuses, commissions, regular overtime or superannuation contributions.

Termination: The benefit will often cease when the insured changes employment, reaches 65 or retires. Not all funds offer a continuation option to transfer the cover to a self owned policy and cover may cease despite the client’s intentions of remaining in the workforce.

Exclusions: Some policies may apply exclusions including depression, drug and alcohol related claims, criminal activity or pre-existing conditions. Some industry funds may cancel the cover at any time.

Handy Hint

It is important to review the paperwork received by the employer super fund to ensure that you are aware of the terms of the cover being offered. Be mindful of:

• Pastime exclusions
• Pre-existing conditions
• Offset clauses for sick leave
• Policies terminating upon cessation of employment
• Policies which cease if no contributions have been payable into the account for a specified period
• Decreasing cover
• The right of the fund to cancel the insurance at any time
• Salary continuance cover which ceases after the insured has made a claim for TPD.

How does the insurance within an industry fund compare with cover offered by an adviser?

To ensure that premiums are affordable for all members without eroding their retirement savings, the products offered by the industry funds are generally basic relative to other providers on the market, however they do provide their members with valuable, (although quite basic) cover.

It is important to consider that retail products offered by Financial Advisers are more comprehensive, have more favourable definitions and offer more guaranteed cover, compared to industry funds and if your employment conditions change the policy remains in force as agreed at the time of application.

The definitions and features with a policy offered by advisers are of higher quality with less offset clauses providing a greater security and opportunity to claim. Furthermore, the level of cover recommended by an adviser will more likely meet your long term needs.

Importantly, being underwritten at the time of application also provides a level of comfort that a claim will be paid.

Conclusion

To ensure you are adequately protected with a quality product, it is important to review your existing insurance arrangements and determine whether these levels are sufficient to meet your long term needs, with the most appropriate features and benefits based on your personal circumstances. To discuss your own personal circumstances, please contact our office.

The information contained in this publication is current as at 27 September 2011 and is prepared by ThreeSixty, a division of GWM Adviser Services Limited ABN 96 002 071749, registered office 105-153 Miller Street North Sydney NSW 2060. This company is a member of the National group of companies.

Any advice in this publication has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on any advice, consider whether it is appropriate to your objectives, financial situation and needs.

Past performance is not a reliable indicator of future performance.
Before acquiring a financial product, you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product.

By Three Sixty Research