Premiums on income protection can be up to 214% higher if a member is defaulted into a shorter waiting period, research presented at the Challenger Financial Standard Technical Services Forum shows.
Presenting at the forum yesterday, Rainmaker head of superannuation research Jason Ross said if a member is defaulted into a 30-day waiting period for income protection cover, they could be paying significantly more.
"Within income protection the waiting periods make a really, really big difference in terms of premiums," Ross said.
"So, you can get defaulted into a 30, 60 or 90-day waiting period. If you actually choose to have 90-day waiting periods your premiums can be two thirds less. That's a huge difference in terms of the premium for the cover you are paying, especially if you take out insurance for many years."
Ross said there is a good reason for the stark cost difference, with funds taking on a larger risk with shorter waiting periods.
"The data indicated that people who have a 30-day waiting period, are a bigger risk for funds," he said.
"The funds are taking on the risk that perhaps this person will be paid out sooner."
Ross also highlighted the huge amount of money insurers are making when you compare total premiums against paid claims, excluding reserves for future claims.
"The total premiums collected for the period ending June 2018 within superannuation was $9.3 billion against which $4.9 billion in insurance claims were paid," Ross said.
"Not for profit funds receive 53% of these premiums yet pay out 59% of the claims, suggesting NFP funds have better payout ratios."
The topic was timely after ASIC and APRA published data on life insurance claims and disputes for the 12 months to 30 June 2019.
The regulators found that while 94% of life insurance claims are accepted by the major insurers, there is significant variance between cover types.