The Advantages And Disadvantages To Employees

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02 Nov 2017

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Death Cover, is a lump sum or income stream paid to your beneficiaries upon your death. The benefit amount to the money in the deceased's account at the time of death plus any life insurance cover through the super fund. Minimum level of Life Insurance with respective to age must be provided by the employer default fund, but you can adjust the amount of cover depending on your needs.

Total Permanent Disability Cover (TPD), is a benefit paid to you if you become seriously disabled and are unlikely to ever work again. The amount is often based on your salary at the time and the number of years remaining before retirement. The shorter the period, the smaller is the benefit.

Income Protection cover, is an income stream you will receive over a specified period if you cannot work due to temporary disability or illness. The usual waiting period for the claims is 60days and the common benefit period is 2 years.

There are three key default cover benefit structures: (a) Age based scale, also known as Unitised cover, (b) Salary based formula, and (c) Nominated amounts. "Lifecycle" benefits are also available in the market, where benefits vary independently in different life stage to accommodate corresponding needs. Another benefit feather is "Indexation", which maintains the real value of benefits.

The advantages and disadvantages to employees of arranging their insurance needs through a superannuation fund

Advantages

Bulk Discount. Superannuation funds has an advantage over individual policies due to their large customer group size. This gives them bargaining power to negotiate for lower insurance premiums comparing to retail purchase of similar products. Employees can then obtain insurance at a cheaper price in bulk with other employees through a fund. Furthermore, employees can get better group insurance deals which often amount to one or two units of ordinary life and disability cover.

Other than that, within a superannuation fund, members with different level of risk are grouped together. Individual are then pooled and diversified, giving better assurance to the insurer. This also allows members in a superannuation fund to pay low premium rates.

Save Cost for Medical Checks. Unlike general insurance provided in the market, many superannuation funds provide members with basic covers (for death, disability, and income protection) automatically without the need for thorough and time-consuming medial health proof. Even if the member chooses to apply for additional cover, they only need to provide some simpler personal health information required by the fund. A member is usually required to take a full medical examination only if he/she is applying for high level of cover, or a pre-existing medical condition is involved. People that falls within particular risk group (such as smokers, obese, family history of critical diseases) are also be required to take according medical assessments.

Tax Advantage. Contributions to the superannuation fund the policies are deducted directly from the employee's before tax income. This reduces the member's taxable income, which in turn reduces the amount of income tax that needs to be paid. This can also compensate the proportion of salary that is taken away from the employee's usage. In addition, if the employee earn less than 10%of his gross income from the employer, he is entitled to a tax deduction claim for his superannuation contributions. And as the insurance premiums are deducted from the superannuation account, a member can get a tax deduction by arranging insurance needs through a superannuation fund.

Disadvantages

Limited Coverage Choice. Often companies only provide corporate superannuation funds to current employees. Therefore, if the employee ceases employment with the organization, he will not be able to contribute into the superannuation fund anymore and the fund may end with no notice in advance. Furthermore, company superannuation funds usually only provided the three most common basic insurance coverage. Choices available is rather limited and in case the employee is seeking for other insurance policies, he will still need to obtain them externally. Also the default cover is in general set at levels that are insufficient for the perceived insurance needs, giving the employee inadequate cover.

Cost on Member. If a member owns multiple superannuation funds, he is most likely to pay for the insurance in each fund. This will result in a substantial amount of duplicating premium and administrative costs. In addition, there are usually delays in claim payment of life insurance benefits, since the money has to first go through the superannuation fund before reaching the member or the beneficiaries. A reduction in real value of the money may be cast on the member if the transition period is too long. Furthermore, superannuation funds mostly comprises only a small number of insurers. This can result in a concentration of risk and in case of the failure of one insurer, a large portion of fund members can be impacted and may even lose all their premiums.

The roles of regulators ASIC and APRA in protecting the interests of fund members and any concerns they may have about the group insurance market at the present time

Role as Regulators

SIS Act 1993 i.e. Superannuation Industry Supervision Act defines the role of APRA and ASIC. It imposes key operational constraints including the "sole purpose test" (ensure super funds provide the promised benefits) and the "conditions for release" (restrain the kinds of conditions under which benefits may be paid out).

APRA provides prudential supervision to all superannuation funds. Its main role is to ensure all contractual liabilities are being met by the funds such that fund members receive what they are promised. APRA achieve so by focusing on three prudential standards: (i)Capital management, (ii)Risk management, and (iii) Governance. To protect the interests of fund members, APRA requires funds to have sufficient capital to cover liabilities, responsive risk management, as well as robust governance. It expects the Board and management team to be accountable for overseeing these areas. On top of that, APRA actively supervises superannuation funds as the industry evolves along (such as the increasing complexity of products). It has adopted a risk-based approach, with Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS) as the core. Under this system, APRA is to recognize and assess areas possessing the greatest threat to the fund while it is still initializing, and execute prompt supervision consequently. This involves a lot of direct engagement with the board before and after any interventions. APRA also relies on assurances and assessments from industry experts including the Appointed Actuary, External Audit and Internal Audit. They provide intuitive assessment information regarding a fund's financial condition, sustainability of its risk management framework, and the accuracy of testing processes. Affirmation of the information will be required from the CEO and CFO.

ASIC regulates market conduct as well as the disclosure obligations of superannuation fund. Its main concern is to ensure information symmetry and sufficient disclosure between fund providers and their members, i.e. a fair market. To achieve the goal, ASIC actively promotes education to fund members so that they have full understanding of the underlying risks and actual return from their policies when making the decision to join a fund. In addition, ASIC is reinforcing the liability and power of fund trustees, who are expected to act in the best interest of the fund members when representing them in managing the superannuation fund. Therefore, ASIC is highly concerned with the relationship between fund trustees and members. ASIC is also promoting the fairness and competence of funds through rigorous governance, including regulating events of misconduct and compliance breaches, as well as assessing the issuance of licenses to fund providers.

Current Concerns

Pricing. In the increasingly competitive group insurance market, significant pressure is placed on pricing and underwriting. Companies attempting to expand their industry segment may set their prices and underwriting criteria at a unsustainable level. Furthermore, APRA is worry about poor data source and practices in pricing. The authority thus carries out various scenario tests with insurers and reinsurers to assess their ability to resist catastrophic events.

Adequate Knowledge. In order to satisfy the needs from the increasingly diversified individual conditions, companies are introducing sophisticated marketing means and distribution methods utilizing advanced technology as funds move to new, more customer centric administration platforms. However, the human resources within do not possess adequate skills to manage these new features in the expanding market.

International Standards. Reinsurance is taking up increasing weight in group insurance industry due to the escalating complexity in products. Companies are also outsourcing their reinsurance policies to diversify their risks, especially systemic risk. This brings complication in the monitoring of group insurance for APRA. It needs to align Australian standard on capital standards, stress testing, and market liquidity risk with reference to the International Basel III framework, which stresses institutions need to take in account of operational risks, pandemic risks, and single claim events such as catastrophic events concentrated in one region.

Concentration of Contracts. The number of group insurance contracts is very limited in the industry and a large proportion of the business in written on a few large insurance contracts only. This leads to concentration risks. Upon the withdrawal of one single, large insurance contract can bring significant destructive consequences to the group insurer. It impacts not only the direct profit income, but also their advantage in economies of scale as less contracts will be sharing the fixed operating costs. Therefore, APRA have to focus on testing the financial strength of group insurers so ensure insurers are prepared for catastrophic events.

Information. Education on the system should be promoted to the public so customers understand what they are signing up. They need to understand the underlying risk and the benefits they are actually entitled to. Common cases are people opt for exclusions in order to receive cheaper quotes when in fact they have given up some essential coverage and be left in predicament. Other than that, group insurers should not allocate any costs of advice to policy holders without their consent (both for the service and the charge).

The governance role of the Trustee of the superannuation fund in overseeing the insurance arrangements for fund members

Super Fund Trustee is a party that holds and manage a superannuation fund at the best interest of the fund members. It induces intense requirements during the tendering process for the selection of group insurer, to ensure fund members are able to enjoy best prices, benefits and service levels.

Service Level. Trustees place heavy emphasis on the provision of financial service, especially intra-fund and single issue advice such that fund members can receive tailored guidance on their strategies and have their actual needs met. For example, trustee want to ensure reasonable level of default cover should be provided to fund members and promote raise in their sum insured. Furthermore, trustees critically evaluate all insurance processes to ensure modern and efficient assistance for members as well as to expedite claim progressions.

Ease in Obtaining Cover. Superannuation funds often carry differences in insurance terms and conditions, such as coverage and rate. Trustee examines the bounds to which members' insurance benefits under previous superannuation funds can be consolidated into their current fund without underwriting. Trustees may also look into universal takeover terms. This allows fund members to transfer between jobs or companies with higher flexibility without inheriting unnecessary loss through the transitions. And even underwriting is inevitable, trustees encourage simplified systems, such as automated underwriting and online underwriting, so that fund members will not be intimidated.

Reporting Processes. To fulfil their responsibility in acting in the best interest for fund members, trustees have strict monitor in the release of information from superannuation funds. They oversee data reports, such as claim case workflow reporting and automated claim processing, so as to perform risk insurance experience analysis (for different demographic, occupational groups, etc). This is to assure the financial strength of insurers and they will be able to commit their agreed liabilities to fund members. Furthermore, trustees monitor the fairness of cross-subsidy with figures obtained from reports and reviews the relationship between insurance costs and underlying risk regularly.

Member Awareness. Trustees are starting to realize the significance of bringing fund members' awareness to underinsurance and the substance for adequate personal indemnity. This is to be support by provision of intra-fun advice to members without incurring significant cost to the members. "Member centric" models should be adopted instead of "Employer centric" marketing models as funds did in the past, bringing in an inclusive customer relationship management system.

Most importantly, the suggestions you have for Kim, including the next steps Kim should take.

Long Term Financial Plan. Kim should identify his future needs and the point in life when he need access to capital. Upon certain life events such as, in Kim's case, marriage, the birth or legal adoption of children, moving to a bigger house and increasing his mortgage, extra level of cover should be taken. In addition, comprehensive insurance should be prepared for expenditure over Kim's retirement, such as outgoings for medical and retirement village, as well as immediate costs like funeral expense. With consideration of his total assets and superannuation funds, Kim should then choose suitable insurance covers and investments both inside or outside his fund in order to cover his future outflows. It is essential to maintain a continuous, diverse source of income, such as an annuity, to fund Kim's different stages of life, and allow for spare cash in case of emergency. Kim can utilize new technology such as Super Calculators, or professional advice for his financial planning.make use of new technology,ogy, such as Super Caluculators and the differemt stages of his life.lows considering how much a

Risk Diversification. Longevity risk has been a struggling issue for a lot of retirees in which they realize their super funds are insufficient to support their life after retirement. it is advisable to source retirement income from investments outside super. However, diversification is the key to success for this strategy. Kim should not concentrate his money on a single investment to avoid the devastation of losing all his life savings in the circumstances of company failure. He can spread out his capital towards the number of financial products provided in the market, including capital growth investments (investments in shares or properties), and interesting-bearing accounts and term deposits, or a mix of them. Since Kim is at his earlier stage of life, he could invest in market shares and real properties, which bear higher risk but more remunerative in long term. In addition, shares allows flexibility in the access of capital since they can be bought and sold in small packages regularly, which suits Kim's more frequent needs in capital as he has plans for the near future (marriage) which comes with significant expenses. On the other hand, interest-bearing accounts and term deposits acquires comparatively less income with much lower risk. They are good options for Kim at a later stage of life, at when he needs a stable source of income and it is more difficult for him to compensate huge losses. However, if Kim prefers delegating the job to the professionals, a managed fund is also an available choice, though he needs to be conscious of the relevant fees structure and the combination of investments within the fund.

Top up Current Super. Since Kim is planning to start a family, his superannuation fund is very likely to be supporting more than just himself at retirement. His spouse and children will add extra expenses in areas such as medical and education. There is even an increasing social trend of parents having to support their children's life after college . Therefore, it is necessary for him to increase his super fund. More than preparing for his family, he gains tax deductions from raising his salary contributions as well as allowing access to government benefits. However, Kim should also keep sufficient money outside his super fund for emergencies, as it can be complex to make large withdrawals from retirement income products or may complicates any tax or social security arrangements.

Shares

A strong portfolio of blue chip shares can deliver good returns. They are more flexible investments than property as they can be bought and sold in small parcels. Owning shares also has tax benefits. However, share markets are volatile. The value of a share can drop dramatically in a few hours and companies can go broke overnight. This can be daunting for new or nervous investors. See shares for more information.

Investment properties

Many people invest in residential property to boost their wealth. You can take advantage of capital gains and there are tax benefits arising from negative gearing and depreciation allowances, especially if you are in the higher tax brackets.

However, people in retirement generally will not buy an investment property as their main investment. It is poor diversification. You could lose seriously if property prices fall in that area, if the property is vacant or if tenants don't pay their rent. If you need money you can't sell part of a property, and you can't sell it quickly at a top price. See property for more information.

Back To TopInterest-bearing accounts and term deposits

These accounts are a good way to earn money for daily living expenses and emergencies. There are no entry and exit fees and your cash is easily accessible. You are sure of getting your money back, plus any interest. However, you will have to pay fees if you want to get out of a term deposit early.

However, there are no capital gains or tax benefits and the interest you earn may not be enough to keep up with inflation. Interest-bearing savings accounts and term deposits will generally earn you less money in the long term than property or shares.

You should spend some time researching online savings, transaction and term deposit accounts to compare different products.

Back To TopManaged funds

If you are interested in a diversified mix of investments but aren't sure where to start, or would rather leave the hard work to experienced people, you may want to consider investing in managed funds.

There are many types of funds, fee structures and investment managers. Do your research before you dive in. Retirees need to be careful about mortgage funds and property funds. Although these have been successful in the past, many people have recently burnt their fingers. See managed funds for more information.

Borrowing to invest

This is a riskier strategy to build wealth more quickly.

The advice should explain why this risk is necessary,

and discuss alternatives. It should discuss risks like

rising interest rates, losing your job or income, and

how you pay back the loan. ‘Margin’ loans involve

additional risks that should be explained.



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