For many members, insurance premiums represent a significant portion of the total costs that come out of their super fund account. But in some funds where the cost of insurance is very high, insurance premiums can dwarf all the other fees and costs put together, according to a new research report from Chant West.

While administration and investment fees get all the attention, insurance premiums can stealthily eat away at superannuation savings, says Chant West principal, Warren Chant. “Most members wouldn’t have a clue whether the insurance premiums coming out of their account represent good value or not. And nor could they, because the level of disclosure in the whole area of insurance is so appalling.”

Chant says the differences in premiums between the cheapest and dearest funds can easily run into thousands of dollars a year. “Take this example. A 50 year old white collar female with $300,000 in death and disability cover would pay $2,965 in premiums in one heavy blue collar industry fund. But if she did her homework, she could actually join a teacher’s fund and pay just $306 a year for exactly the same cover. So, one fund is $2,659 more expensive which is nearly 10 times more expensive than the other. The difference at age 60 is a factor of 20 times.

“The impact of these differences in premiums over a number of years can be very large. For example, a 40 year old white collar male would pay total premiums over the following 20 years to age 60 of about $5,500 in the cheapest fund and $42,800 in the most expensive fund (all in today’s dollars). That’s a $37,300 difference. So if you’re looking at total costs, the amount you can save in insurance makes the other fees and charges almost irrelevant.

“The range of insurance premiums is quite staggering, but the problem is that most people don’t know about it because it’s just too hard to work out. It’s not easy for us, and we have a team of research analysts, so what hope does the man in the street have? Yet it’s vitally important because every dollar that goes towards insurance premiums is a dollar that’s not being invested. If you’re paddling hard to grow your retirement nest egg, it can be like dragging a heavy anchor.”

The Chant West report lists nine disclosure standards that should be introduced for all insurance offerings. They cover a range of issues from archaic industry conventions to simple non-disclosure of commissions. It points out that almost all retail funds include a commission element in their premiums, and this generally ranges from 20% to 30% of the base premium. “Most people wouldn’t even be aware that someone’s receiving this commission,” Chant says, “and the worrying thing is that the percentages have been creeping up in recent years.”

Chant West’s nine disclosure standards are:
1. Show all premiums on the fund’s public web site
2. Show all premiums gross of tax
3. Show premiums based on current age
4. Show premiums per $1,000 of cover
5. Show premiums based on monthly payments
6. Show income protection premiums excluding stamp duty
7. Show any additional administration or policy fee alongside premium tables
8. Separate insurance premiums from adviser commissions
9. Show examples of insurance premiums in the PDS (similar to the fee example)

Chant believes that improved insurance disclosure is another step towards informed decision-making. “Many aspects of super have become more transparent in recent years, and that’s a good thing. The more people can understand and compare apples with apples, the better decisions they’ll make and the more benefit they’ll get out of their super in the long run.

“But while fees for administration and investment are now better disclosed, insurance premiums, terms and conditions are still a ‘dark art’, only understood by a select few. And, quite frankly, that’s because it has suited some in the industry for it to be that way. Insurance offerings are improving all the time, so it’s time to shed more light on both the costs and benefits of insurance.”