The Federal Government's proposal to ban default life insurance in superannuation for younger members and those with low balances would supress retirement savings and cost the economy $2.46 billion annually, latest research from AIA Australia shows.
Treasurer Scott Morrison announced in this year's Budget that superannuation funds will move from the default life insurance arrangements for members under 25 and low balance account holders to an opt-in framework.
Budget papers said this was being done as a means of "protecting Australians' retirement savings from undue erosion by fees and insurance premiums."
The life insurer found the Government's solution to address the erosion of superannuation balances would only benefit members under 25 years old by saving $1400 or 0.27% over the course of their working life.
More than 1.4 million Australians under 25 would be left without cover under the proposed reforms, while the opt-in rate is likely to be less than 10%, even with extensive marketing campaigns, the research said.
AIA Australia said it has paid $84 million on 1200 claims for members under 25 since 2015, noting the rate of income protection, and total and permanent disability claims is about the same for people aged 20 and 30.
It also paid more than $75 million in claims to members with active but low balance superannuation in 2017.
AIA Australia and New Zealand chief executive Damien Mu said it is simply not the case that young people don't require cover or that they work exclusively in casual or part-time employment.
"More than 600,000 young workers under 25 do so on a full-time basis, which is 42% of the under 25 working population. Of those, almost half are full-time workers in blue-collar jobs," he said.
Mu added one of the more serious consequences of the proposed policy change is that people working in casual jobs and high-risk occupations such as mining and construction may be unable to attain life insurance, particularly for disability.
"This is because group insurance schemes were designed to accommodate a broad spectrum of risk across the nation's policy holders, and a change to the default model would leave these members exposed where there is some form of underwriting."
Combatting the erosion of member balances was among the Productivity Commission's recent recommendations in its review of competitiveness and efficiency of the super system. The Commission called for an independent review of insurance in superannuation.
Insurance should be made opt-in for members under 25 and insurance cover should cease on accounts that have had not contributions for 13 months, it said.
The PC estimates low-income super members and their life insurance arrangements could erode anywhere between 14 and 25% of retirement balances.
In terms of premiums paid, default insurance in super offers good value for many - but not all - members, the PC noted. Insurance in super is of little or no value for some members, the PC added, "either because it is ill-suited to their needs or because they are not able to claim against the policy."
In terms of duplicate accounts, AIA Australia said the Government can eliminate these via measures outlined by the Insurance in Superannuation Working Group Voluntary Code of Practice.
"By adopting new measures on inactive accounts, the government will achieve two-thirds of its targeted cost savings for members, while addressing the important issue of duplicate accounts. This is what the government should be focused on, removing cover only in instances where insurance is not required," Mu said.