Life insurance is an umbrella term that can include coverage for death, total and permanent disablement, income protection and trauma insurance. Trauma insurance can help you financially as you recover from a serious illness or event such as cancer or having a heart attack or stroke.
If you need to take out life insurance to protect yourself and your loved ones financially, you have three broad options – group life insurance, retail life insurance, or arranging life insurance yourself directly through an insurer (direct life insurance).
In this article, we will explain:
- the difference between group and retail life insurance
- the pros and cons of group and retail life insurance
- FAQs about group life insurance
- how direct life insurance works
The difference between group and retail life insurance
Group life insurance is a scheme that’s taken out with your superannuation fund or employer. The policy is held by the superannuation fund trustee or employer, but the lives insured are those of the super fund members or employees.
Group life insurance is purchased in bulk by the super fund or employer for multiple people. It is a form of ‘pooled insurance’. Often a default level of cover will be provided to all members of the super fund or to the employees of an organisation. According to the latest figures, more than 70% of Australians have group life insurance through their super funds.[i]
Retail life insurance on the other hand is cover purchased via an intermediary such as an insurance broker or financial adviser.
Both group and retail life insurance cover are provided by insurance companies in exchange for the payment of premiums.
The pros and cons of group life insurance
Group life insurance has both advantages and disadvantages.
- Because cover is bought in bulk, the premiums are usually cheaper.
- There is a simpler application process compared to retail life insurance cover. There may be no application process at all (and therefore no health checks) for a default level of cover. This means that people who may not necessarily qualify for retail life insurance cover (or who may have exclusions or higher premiums applied to their policy to cover for additional risks) can potentially get generic cover via group life insurance.
- It’s easy to pay group insurance premiums through your super fund or your pay. You can arrange for the premiums to be automatically deducted, so you don’t have to budget for them.
- Paying for your group life insurance through your super fund can be tax-effective. Contributions that your employer makes to your super (for example, the compulsory 9.5% super guarantee) or any additional salary sacrifice contributions you make to super are taxed at a concessional rate of just 15%. This is lower than even the lowest marginal tax rate in Australia. It can therefore be most tax effective to pay for your life insurance through super rather than any other way.
- Group life insurance can be bought by companies of varying sizes, from small-to-medium sized enterprises through to large multinational corporations. However, the larger the organisation, the larger the bulk purchasing power and the cheaper the coverage that is likely to be negotiated.
- The terms and conditions of the cover are susceptible to change for existing policy holders whereas retail policies terms and conditions are protected.
- Group polices are not guaranteed renewable whereas retail policies are.
- The terms and conditions may be more restrictive than those on retail life insurance policies. For example, if you have income protection as part of your life insurance coverage, there may be longer waiting periods, shorter benefit periods, or both. Income protection helps you if you’re temporarily unable to work due to illness or injury.
- The coverage of the policy is usually less broad than a retail life insurance policy. For example, if you have total and permanent disablement cover in a group life insurance policy, you will usually only be covered if you are unable to work in any occupation, not just your current occupation. This is obviously a much stricter requirement and reduces the likelihood of a successful policy claim.
- The amount of cover you can get with group life insurance is usually lower than you can get with a retail life insurance policy.
- The amount of cover usually decreases as you get older with group life insurance. It can stay the same (or increase with inflation if you pay a higher premium) with retail life insurance cover.
- Stepped premiums are usually the only option available. This type of premium increases as you get older. Retail life insurance policies on the other hand tend to offer a choice between stepped and level premiums. Level premiums stay the same each year. They are higher than stepped premiums initially, but stepped premiums overtake them over time.
- Paying for group life insurance through super reduces your superannuation balance.
- If you pay for group life insurance through your super, it usually automatically ends at age 65 or 70 (though you may be given an option to continue). However, it’s important to understand that you may not need the cover when you reach that age anyway.
- You usually can’t choose a policy owner other than the life insured. The policy owner receives the benefits of the policy (for example, the insured sum upon a specific event happening).
- Group life insurance is generally a ‘one size fits all’ approach. Retail life insurance policies can be more tailored to suit individual needs. For example, more or less coverage depending on your financial circumstances. You might need more coverage at certain times of your life (such as when you have a large mortgage and young children who are financially dependent on you) than others.
- You (or your loved ones) will usually have to arrange a claim yourself. Your financial adviser or insurance broker can do this for you if you have a retail life insurance policy.
- Not all types of life insurance cover (i.e., death, total and permanent disablement, income protection and trauma insurance) may be able to be purchased through a group life insurance policy. You will be more likely to get comprehensive coverage through retail life insurance.
Group life insurance FAQs
Will group life insurance via my super fund or employer be enough for my needs?
This depends on your individual financial situation. It may provide more or less coverage than you need.
Does group life insurance end when I stop making contributions to my super fund or leave my employer?
It can do if you have been paying for group insurance premiums via your super fund. The fund is legally required to cancel your insurance if you haven’t made a super contribution for more than 16 months. However, you can elect to keep your insurance cover via your super fund if you elect to keep it and to continue having the premiums deducted from your super balance.
If you leave your employer and your life insurance premiums were being deducted from your pay, this payment and coverage will stop.
The pros and cons of retail life insurance
Retail life insurance has both advantages and disadvantages.
- Policy terms and conditions are protected and cannot be unilaterally changed to your disadvantage.
- The terms and conditions may be less restrictive than those on group life insurance policies. For example, if you have income protection as part of your life insurance coverage, there may be shorter waiting periods, longer benefit periods, or both. In addition, if you have total and permanent disablement cover in a retail life insurance policy, you may be covered if you are unable to work in your current occupation (if you choose that type of cover), not any occupation. This requirement is less strict and increases the likelihood of a successful policy claim but is usually more expensive.
- Coverage is usually more comprehensive than the coverage available in group life insurance policies. For example, you will usually be able to access all forms of life insurance cover if you want them (death, total and permanent disablement, income protection and trauma).
- You can usually insure yourself for a larger amount than you can with group life insurance policies.
- Your level of cover can stay the same over time (or increase in line with inflation if you pay a higher premium).
- You usually have the choice between level and stepped premiums. This flexibility can allow you to better cater for short or long-term life insurance needs. For example, stepped premiums are usually cheaper than level premiums when you’re younger, and vice versa.
- You can usually choose who the policy owner is with a retail life insurance policy. The policy owner may (or may not) be the life insured. For example, ownership could be solely in your partner’s name, or you could have joint ownership with your partner. You usually can’t choose the policy owner with group life insurance; the owner is the life that is insured.
- Policies can be more tailored to your individual needs. For example, you can increase or decrease your level of coverage to suit your current needs, rather than having to accept the ‘one size fits all approach’ of group life insurance policies.
- Your insurance broker or financial adviser who helped arrange the policy can assist you or your loved ones with the claims process. You (or your loved ones) will usually have to arrange a claim yourself if you have a group life insurance policy.
- Retail life insurance policies are usually more expensive than group life insurance policies. However, it’s important to understand that this higher cost is the result of a generally higher quality of product. Retail life insurance policies generally have less restrictions and broader coverage than group life insurance policies.
- There is usually a longer and stricter application/approval process. For example, you will usually have to undergo a health check, which you usually won’t have to do with a group life insurance policy. This health check may reveal pre-existing health conditions which could result in your application being declined, or exclusions or higher premiums being placed on your coverage.
Direct life insurance
Direct life insurance can be bought directly from insurance providers. However, it’s important to understand that you have very little negotiating power as an individual with insurance companies. You may pay higher premiums than you would with either group or retail life insurance policies.
Direct life insurance policies may also have more exclusions built into them and they may not require you to undergo a medical assessment until you make a claim. Any pre-existing conditions may exclude you from making a successful claim. Retail life insurance policies on the other hand usually require you to undergo a medical assessment as part of the application process, so once you are approved you will have peace of mind knowing that you will be able to make a claim if necessary.
It’s very important to do thorough research if you want to take out direct life insurance. However, this can be time consuming and confusing to do. There is a huge range of insurers and life insurance products available in the Australian market. Even a small difference in policy terms and conditions can make a significant difference to the extent of cover you can get and the premiums you will pay.
Financial advisers and insurance brokers already have this market knowledge, and they can help you to find the right life insurance product for your needs. They can also answer any questions you have before you make a decision.
The bottom line
Whether group, retail or direct life insurance is the best option for you will depend on your individual financial situation. It’s best to seek professional advice to get the right amount of cover for your specific needs. Everyone’s needs are different.
You should also regularly review your level of coverage with your adviser whenever market conditions or your individual circumstances change.