Insurance in Retirement
For many years now, insurance has been an integral part of superannuation. By pooling risks across the fund, trustees can provide their members with cover at a substantially lower cost than if each member sought cover independently.
Insurance helps us manage risks efficiently and pooling is fundamental to how it works. We insure our houses in case of loss and our health in case of illness. Obviously, we hope not to need it, but by sharing risk with other people we are able to afford protection against adverse events.
Group Life Insurers typically provide death, disability and income protection to superannuation fund members in the accumulation phase with each member paying a small premium that combined will go toward paying any claims.
But what about once the member has retired?
Retirees still adequately insure their home, their car and other valuable assets, so why not use insurance to protect their income in retirement?
Typically, when members retire, they receive a lump sum to support their life in retirement, but many may also want to protect their retirement income. For members wanting to fund a better lifestyle for the duration of their retirement – more than the basic level of protection the Age Pension provides – they need an income that will last for life.
The standard approach used by superannuation funds is to sell retirees an account-based pension to provide an income. What people cannot know for sure is how long their money needs to last. No one knows how long they will live and as life expectancy continues to increase, monies will need to last a lot longer than most people realise.
This creates a challenge for superannuation funds: how to help their members manage longevity risk—the risk of outliving their savings.
Recently I addressed the ASFA Spotlight on Insurance on the topic of “Insurance in Retirement”. This was an opportunity to urge superannuation funds and life insurers to consider opportunities to provide better benefits for retirees.
Imagine the peace of mind if Australian retirees purchased insurance that guaranteed an income for life, no matter how long they lived.
This type of product is now available in Australia. It is an investment linked pension that provides certainty that income is paid for life by pooling the longevity risk with other retirees.
Now retirees can not only insure their house, car and other valuable assets but they can insure their most valuable asset—their retirement income.
Redesigning retirement should be on every super fund agenda.