Industry offers temporary fix for junk TPD insurance in superannuation

The cover is much harder to claim if you’re unemployed, casual or part-time, because of the ‘activities of daily living’ test.

About 10 million Australians have total and permanent disability (TPD) cover through the default insurance in their superannuation. Every insurance policy is different, but one of two tests are generally used to assess claims.

• One test, which is relatively easy to satisfy, requires a person to show that their injury or illness means they can’t return to work.
• The other test, which is much harder to satisfy, is known as the activities of daily living (ADL) test – or the very similar activities of daily working (ADW) or everyday working activity (EWA) tests.

These tests usually require a person to show they can’t do at least two of a list of five physical activities, such as walking, talking, feeding themselves, using the bathroom and dressing.

People who are unemployed, in part-time or casual work at the time of becoming injured or ill, often face the much tougher ADL test.

New research from Super Consumers Australia has found that ADL and ADW tests are common when claiming TPD insurance in super.

Text-only accessible version

If you need to claim on the total and permanent disability (TPD) insurance in your super, the test that applies to you will generally depend on how much you are working.

This two-path system is temporarily on hold until 1 January 2021 for people out of work because of COVID-19. (The scheme initially only lasted until 27 September 2020.)

Super Consumers Australia director Xavier O’Halloran says this is a “band-aid solution”.

Below is the percentage of policies that impose a tougher test for people in different types of employment.

Member’s situation on the date they became disabled % of policies that require the member to claim under more restrictive definition:

Employed and working more than 15 hours/week – 0%

Employed but working less than 15 hours/week – 22%

Employed but working less than 15 hours/week (on average over 3 months) – 34%

Unemployed for less than 3 months – 48%

Unemployed for more than 6 months – 71%

Unemployed for more than 12 months – 94%.

What about mental health?

The test’s sole focus on the ability to do physical tasks also makes it much more difficult for someone to make a claim due to a mental health condition. 

Alexandra Kelly, director of casework at Financial Rights Legal Centre (FRLC), says it is “very difficult” for a mental health claimant to satisfy the ADL test. “You’re looking at effectively needing to prove you’re catatonic in some way,” she says.

A 2019 review of TPD insurance by corporate regulator ASIC  found that TPD claims assessed under the ADL (or the similar ADW) test were five times more likely to be turned down than claims assessed using the standard ‘any occupation’ test.

Industry announcement won’t solve problem long term

Life insurers who offer cover through super have promised to back away from more restrictive terms for now, but this won’t address the inequality in the long term.

“Restrictive tests have no place in TPD insurance, whether during a pandemic or not,” says Super Consumers Australia director Xavier O’Halloran. “Super Consumers Australia is calling on funds and insurers to ban these junk terms once and for all.” 

‘Ignoring the underlying problem’

The scheme will end in January to coincide with the end of the government’s JobKeeper program.

Josh Mennen, principal lawyer at Maurice Blackburn, says people who are out of work and make a claim after this date will face a tough task.

“Disabled workers who make claims after 2020 will again be fair game for substandard disability insurance despite paying full premiums,” he says.

“Hence the [industry’s] announcement is barely a half-measure in that it narrowly focuses on a short term symptom whilst ignoring the underlying problem.”

Text-only accessible version

Life insurers have announced a scheme which sees people who become unemployed or have their hours reduced due to COVID-19 have their claims assessed under the easier test available to those still in full-time work.

The scheme will expire on 1 January 2021. After that date people who have become unemployed for a period of time, or had hours reduced and become ill or injured, will again be assessed under the much harsher test.

Stage 1: Before 11 March

Employed people = standard test (12% decline rate)
Unemployed/Part-time work = ADL test (60% decline rate)

Stage 2: From 11 March to 1 January

Employed people = standard test (12% decline rate) and unemployed/part-time work due to COVID-19 = standard test (12% decline rate)

Stage 3: After 1 January

Employed people = standard test (12% decline rate)
Unemployed/Part-time work = ADL test (60% decline rate)

When does the tougher test apply?

Super Consumers Australia analysed the default TPD insurance policies of 31 large super funds and found that in 2019, every policy included an ADL or an ADW test. 

Based on the eligibility criteria in these policies, unemployed people were most at risk of having a claim assessed by an ADL or ADW test. 

The amount of time someone can be unemployed before the ADL (and other similarly strict tests) kick in differs from fund to fund. In some cases, it can be less than one month. 

By contrast, Construction and Building Unions Superannuation (Cbus) members don’t face the harder ADL test until they’ve been out of work for two years.

BT Super also confirmed to Super Consumers Australia that it will change its policy on 1 October 2020 so that the ADL test only applies to people who have been unemployed for two years.

“We’ve seen from the commitments of BT and Cbus that removing these terms is in the best interests of members,” says Super Consumers Australia director Xavier O’Halloran.

“Now, we’re calling on others to do the same.”

Part-time and casual workers

Some policies also require claims by part-time or casual workers to be assessed with an ADL or ADW test. More than a quarter of 2019 policies analysed by Super Consumers Australia applied such a test to a person who was working less than a minimum number of hours per week at the time of becoming ill or injured. 

Once the JobKeeper payment ends on this day, more than 300,000 people will again be vulnerable

The restrictive terms won’t be enforced temporarily, but they will again apply to people out of work from 1 January. Consumer advocates say this is concerning given that the Reserve Bank of Australia is forecasting higher unemployment until 2022. 

Once the JobKeeper payment ends on this day, more than 300,000 people will again be vulnerable. These members are in policies that include restrictions around employment that mean they’d face the much tougher ADL test if they made a claim and had been unemployed for any length of time.

Same premiums, less-valuable insurance 

Generally, people pay the same premium for TPD insurance in their super, regardless of whether they’ll face the standard test or the much tougher ADL or ADW test.

“Until the industry disavows the use of substandard definitions like ‘activities of daily living’, the heart of the problem will persist,” says Mennen.

What compounds the unfairness is that the very factors that make a person eligible for an ADL test (or another similarly restrictive test) may mean they’re already financially disadvantaged.

‘Balance erosion’

Another issue for those out of work or earning a low income is ‘balance erosion’ – the slow loss of value over time. 

For low-income Australians, the cost of their premium could mean they have $85,000 less (about 14% of their nest egg) to spend in retirement. 

Jeremy Poxon, a spokesperson for the Australian Unemployed Workers’ Union (AUWU), says that newly unemployed workers will be disadvantaged by this “needlessly punitive” eligibility criteria.

“Before [COVID-19], we already knew that the ADL eligibility tests unfairly discriminated against unemployed workers,” Poxon says.

Insurance in super should meet community expectations

In its 2018 inquiry into super, the productivity commission concluded that not all members get value out of insurance in super, and that differences in eligibility and exclusion criteria contribute to inequitable outcomes across the sector. 

The long-term disruption to the job market caused by COVID-19 has simply amplified these inequitable outcomes, in that many more people now face stringent eligibility criteria.

Super Consumers Australia calls for ‘universal terms’

Super Consumers Australia has called for the introduction of universal terms for insurance in super to prohibit unfair eligibility criteria, such as ADL tests, and to deliver better outcomes for members.  

“The legislation covering insurance in super says that fund trustees must act in the best interests of the beneficiaries of that insurance,” says Rebecca Curran, Super Consumers Australia senior policy adviser.  

“Scrapping unfair ADL tests and making it easier for people to understand and compare different policies would show that funds are genuine about meeting this obligation.” 

Now more than ever, people should be able to have confidence that they and their loved ones will be looked after

Rebecca Curran, senior policy adviser, Super Consumers Australia 

Treasury released a consultation paper on universal terms in insurance in April 2019 in response to a recommendation by the Financial Services Royal Commission. Consumer advocates made submissions strongly in favour of introducing universal terms, but the government has yet to respond to the review. 

“People reasonably expect that the insurance they pay a premium for will cover them if they can no longer work due to permanent incapacity,” says Curran. 

“Now more than ever, people should be able to have confidence that they and their loved ones will be looked after.”

Note: This article has been update to reflect the FSC announcement that the initiative has been extended from 27 September to 1 January 2021.

Have you had difficulty claiming on the TPD insurance through your super? 

Does an ADL test apply to your claim? 

Super Consumers Australia at CHOICE is interested in hearing your story about junk TPD insurance. Get in touch with us at super@choice.com.au.