Need to know
- Super Consumers Australia is calling for the government to improve the provision of disability insurance
- A former superannuation minister also says it's time to review this insurance to see if there's a better way
Super Consumers Australia has been calling on the government to find a solution that protects all Australians who become ill or injured and can no longer work and earn.
Former Senator Nick Sherry, now chair of TWU Super, was Australia's first superannuation minister, from 2007 to 2009. He believes it's time to ask whether there is a better way to offer disability insurance.
"My argument is: let's look at something better, stronger and more comprehensive outside super," Sherry says.
"I don't say 'remove it from super and do nothing', I say 'only remove it if we have something more comprehensive'."What is insurance in super?
The aim of disability insurance (or total and permanent disability insurance) is to provide you with money if you suffer an illness or injury that prevents you from working again. It provides a lump sum payment to give you financial security and help you afford treatment.
When you sign up to a super fund, you generally automatically get disability and death cover unless you choose to opt out. You pay for this cover through premiums deducted from your super balance.
'Holes in the safety net'
This insurance can be a crucial source of income for people with a disability, but it's an imperfect system – the results are calamitous when people pay for this cover but become unable to work and have their claim rejected.
We've previously shared stories from people who can't work but don't get any payment from their insurance because of restrictive terms in their policies that made it almost impossible to successfully claim because they were working casually or because they were in an occupation classed as dangerous.
The Australia Securities & Investments Commission (ASIC), the industry regulator, has identified policies with these restrictive terms as low value. The title of an ASIC report on this insurance gets to the heart of the problem: there are holes in this vital safety net.
People outside the safety net
One key problem with offering disability insurance through super is that not everyone has super, or enough super, to keep paying for insurance premiums. If someone's super account gets too low to pay the premiums, they have no cover and get nothing, even if they suffer an illness or injury that stops them working again.
Other groups of people without super may include carers, people doing domestic duties and unemployed people. Self-employed people or gig economy workers are responsible for making their own super contributions and may not have made them.
Australia's first superannuation Minister, Nick Sherry, says insurance came into super 'by accident' rather than being the result of a consultation
There are also significant numbers of Australians who aren't paid the super they're owed by their employers, including some who have never been paid super.
The upshot is that not everyone can get a lump sum payment if they become disabled and lose their capacity to work.
Insurance in super overlaps with other safety nets
"The current insurance arrangements in terms of death, disability and salary continuance overlap with some of the social security arrangements we have," says Sherry.
Outside of insurance in super, there are other ways a person with a disability can get financial support. These can include:
- Worker's compensation – an insurance payment made to those injured at work or who become sick due to their work. It pays for lost wages, medical expenses and rehabilitation costs. This compensation varies from state to state.
- Compulsory third party insurance, for those injured and not at fault in a vehicle accident (though sometimes not single-person accidents). Again, this insurance varies between states.
- Disability Support Pension (DSP). The government makes this payment to people with a permanent physical, intellectual or psychiatric condition that prevents them from working. The majority of people who apply for the DSP are unsuccessful and can then apply for the lower JobSeeker.
- JobSeeker Payment. This payment helps those who are sick or injured and can't do their usual work for a short period. It's also a more general payment the government makes to people between 22 and Age Pension age who are looking for work
- Public liability insurance. Some companies that deal with the public must take out this insurance, which makes payments to any member of the public who is injured or dies at the company's site.
- Other life insurance. This can either be in super or other life insurance you purchase through an adviser.
Another relevant payment is the National Disability Insurance Scheme (NDIS). The NDIS gives financial support to disabled people to improve their quality of life. It's publicly funded and not means-tested.
Another complication here is that in some cases, the payout you get from the insurance in super will be reduced if you're also receiving another payment such as workers' compensation or money from an accident payment scheme.
There may be inefficiencies across this complex, overlapping network of support systems.
"Some of these schemes have overlapping goals, and it's not clear that working in silos is the best way to help Australians living with disability," says Super Consumers Australia policy adviser Franco Morelli. "We need to make sure that the system is efficient and covers everybody without exception."
What if someone is disabled and their claim is rejected?
If someone becomes disabled and their claim on the TPD insurance in their super is rejected, or they don't have this cover, there are still social support systems that can help them. But for many, relying on these alternative income payments will see them below the poverty line.
In the most recent analysis (2009), Australia was ranked last among OECD countries for the relative income of people with disabilities.
A spokesperson for the Australian Council of Social Service said the Disability Support Pension does not provide support for all disabled people who can't work, with only around 40% of applicants getting the payment.
"Most people who lodge a claim for the Disability Support Pension have it rejected," the spokesperson said.
"We need to reform eligibility requirements for DSP so that people with a disability or chronic health condition that prevents them from being in sufficient paid work get access to it."
In the most recent analysis (2009), Australia was ranked last among OECD countries for the relative income of people with disabilities
ACOSS says that disabled people increasingly get the lower JobSeeker Payment instead of the DSP and that 40% of people receiving JobSeeker can't work full-time because of illness or disability.
JobSeeker has been heavily criticised by anti-poverty advocates and economists for being too low. As of 2020, the payment was halfway below the poverty line.
As of June 2022, the weekly base rate of JobSeeker for a single adult with no child ($334) was massively under the Henderson Poverty Line ($616 per week), a commonly used measure of poverty.
In considering these systems and how well they support people with disability, it's useful to keep in mind the distinction the OECD draws between social assistance (which aims to guarantee people a basic standard of living) and social insurance (which is more about protecting people from income loss stemming from disability).
Is insurance in super draining retirement income?
The Productivity Commission, an independent body that provides research and advice to the government on economic and social issues, found that paying for this insurance across your working life can significantly lessen the retirement income you get. This impact was worse for people who had low balances or had spent time out of the workforce.
The Commission found that low-income workers could have $85,000 less to spend in retirement from paying for this insurance. Balance erosion was one reason the Productivity Commission recommended, in December 2018, that the government set up an independent review of insurance in super within four years. This time has now passed.
ASIC has also raised questions around whether this current system is good value. It found that some members get relatively poor value for money from the default insurance in their super.
Finding the right insurance for your needs
Another issue Sherry raises is the difficulty in comparing insurance offerings across funds.
There are two major problems here. Firstly, the level of cover varies greatly from fund to fund. The documents outlining the cover can be extremely long and legalistic. Even lawyers specialising in this field find it difficult to figure out exactly what a person is covered for. Secondly, even if people can easily understand which funds offer what cover, the situation is complicated by the fact that it's bundled with an unrelated product in super. Should you leave a fund that has low fees and is performing well for another fund that isn't doing as well building retirement income, but that offers better insurance? Or vice versa?
Another complication is that super funds and insurers can change the terms of the policy at any time. Even a diligent member with the inclination, time and legal knowledge to thoroughly check their policy when they join a super fund may find the fund and insurer changes the terms down the line so it no longer meets their needs.
Why is insurance bundled with super?
In considering whether bundling disability insurance with superannuation is the best way to offer this cover, it's worth taking a step back to ask why this insurance ended up here.
There was no discussion or debate about including insurance ... It came into the system by accident – it was a decision by individual funds
TWU Super chair and former superannuation minister Nick Sherry
Sherry explains that insurance came into super "by accident" rather than being the result of a consultation.
"There was no discussion or debate about including insurance in the system from the point of view of retirement income," he says. "It was the decision of individual funds."
Sherry also makes the point that Australia is unusual in offering disability insurance through its retirement income system.
Another way
One possible way to improve disability insurance would be to adopt a more comprehensive system covering all Australians unable to work after suffering an illness or injury.
New Zealand's Accident Compensation Corporation (ACC) pays for treatment for anyone injured in an accident. The corporation's website sets out how comprehensive its scope is: "It doesn't matter who you are or what you were doing when you were injured."
New Zealand is now moving towards a similarly comprehensive system for anyone who can't work because of illness or injury.
Fixing the system is the real goal
"It's not fair to have a default insurance system that only works for some of us," says Morelli. "We need to fix the system."
"The Commission recommended a review of this insurance as a means to an end. That end would be to make sure the system is working for all Australians who become disabled and can no longer work. It's time to urgently focus on that goal."
This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.
Stock images: Getty, unless otherwise stated.
