Industry Super Funds provide a range of insurance benefits to their members including income protection and death and total and permanent disablement cover. Unfortunately, as we all know, as far as the quality of insurance contracts are concerned, the ‘devil is in the detail’. There is at least one significant flaw in the majority of the industry super funds’ insurance offerings.
The flaw I am referring to is the ‘income off-set provision’ under their respective group income protection policies. We have surveyed a number of funds including Catholic Super, Cbus, Australian Super, HESTA, HostPlus, Care Super, NGS Super and Media Super. The ‘off-set provision’ is fairly consistent between all these funds.
If an individual suffers an accident or illness and is unable to work the ‘off-set provision’ can have a significantly adverse effect on the benefit received.
The ‘off-set’ clause is defective due to the fact that it off-sets any benefits received under any other disability, injury or sickness insurance policy (including income protection policies). While I understand the intent of the wording, it unfortunately can have a significant adverse impact, if a fund member has two or more polices in place.
It is important to understand the purpose of the ‘off-set provision’, which effectively is to ensure that an individual who is on claim, does not receive excessive benefits, as there would be no incentive to return to work.
The industry broadly accepts that an individual should be entitled to cover up to 75-80 per cent of their pre-disability income under an income protection policy.
This provides a reasonable level of cover but also provides an incentive to return to work as it is less than the pre-disability income.
So where do industry super fund policies fail their members?
This is best explained by way of an actual case study where I assisted a client’s family member on a pro bono basis.
My client’s brother was diagnosed with a terminal illness and had income protection cover under both of his industry super funds. He did not receive any specific advice about his insurance requirements. I offered to assist with the claims management process, as this is part of our normal service offering and given the circumstances, I wanted to extend this service to my client’s brother. We managed the claims with both funds and the good news is the claims were accepted.
The benefits are currently being paid, well, partly at least…
Let me explain, before submitting his claim my client’s brother had a pre-disability income of $9,545 per month. As often happens, over his 40-year career, he ended up with two industry super funds which provided associated insurance cover. (See BLS statistic in opening paragraph).
Under fund A, he has a monthly income protection benefit of $3,000, with a five-year benefit period. Under fund B, he has an additional $5,700 per month, again with a five-year benefit period, thus providing him with a total monthly benefit of $8,700.
As his pre-disability income was $9,545 per month, the maximum monthly benefit he would normally be eligible for is 80 per cent of this amount, ie, $7,636. That would apply if he had been the member of a single fund. However, because he is a member of two industry funds, the ‘off-set’ clause is being applied.
What does this mean in practice?
Well, at the time of writing, my client’s brother is receiving a (gross) amount of $3,000 per month from fund A and an additional monthly amount of $2,700 (ie, $5,700 to $3,000 – offset from fund A), providing a total monthly benefit of $5,700 per month (before tax).
In my view, however, he is being short-changed by $1,936 per month all because of the ‘off-set provision’. The outcome is that he is receiving less than 60 per cent of his pre-disability income rather than 75-80 per cent. Additionally, a premium for $5,700 of monthly cover was being deducted from his account for a benefit that was never going to be paid in full!
While this is legally correct, I think you might agree that morally it is just plain wrong. At a time when he needs this insurance policy the most, it is letting him down. I believe he deserves a better outcome from his industry funds.
Incidentally, I should point out that retail income protection policies also generally off-set any income received from other income protection arrangements.
However, if an individual is receiving quality advice from an adviser, this is generally highlighted and dealt with as part of a suitably tailored insurance program.
Desired outcome
Industry super funds should address this issue with their group Insurers. In my view a simple adjustment to their ‘off-set’ clause would be sufficient, for example:
Instead of applying an off-set clause which reduces benefits being received from any other income protection policy they could simply amend the wording, as follows:
The income protection benefit will be offset (reduced) by any of the following other payments:
Benefits payable under other income protection insurance policies but only where the total monthly benefits payable exceed 80 per cent of pre-disability income.
I think you would all agree that this is fair and reasonable and at the very least should keep within the spirit of the principle of ‘utmost good faith’.
Gary O’Sullivan is principal at Blueleaf Consulting
