Super funds urged to make faster payouts as mental health insurance claims see 'unprecedented spike'

Australia Broadcast Center

15-07-2025

Mental health illness is now the main reason for total and permanent disability (TPD) claims, with consumer advocates warning insurers and superannuation funds may be dragging out insurance payouts for people with mental illness.
New data, looking at insurance held outside of super, found insurers spent almost double the amount in payments in 2024, compared to five years earlier.
The data, from the Council of Australian Life Insurers (CALI) and KPMG's Cause of Claims Results report, found life insurers had paid out more than $2.2 billion for retail mental health claims in 2024, with mental health TPD claims accounting for one-third of total claims paid.
CALI also found mental health illness made up 20 per cent of income protection claims, which resulted in payouts of $887 million in 2024.
"Australia is reaching a tipping point. The entire safety net, not just life insurance, is under pressure," said CALI chief executive Christine Cupitt.
"Every year we see a growing number of people, particularly younger Australians, leaving the workforce for good due to mental health conditions," Ms Cupitt said.
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The Productivity Commission in 2020 calculated that mental illness costs Australia up to $220 billion annually.
CALI's data found the rate of TPD claims for mental health among people in their 30s had increased by 732 per cent over the past decade, but Ms Cupitt says a lump sum payout may not provide lasting financial security, particularly for younger Australians with decades of potential working life still ahead.
"People are being left with little choice but to label themselves totally and permanently disabled, even where the medical evidence shows there is a chance they could return to work," she said.
As retail insurers warn of a spike in mental health claims, consumer advocates warn that, outside of that, many Australians hold TPD insurance within their superannuation fund.
They say in cases where people are insured through their super, many are facing delays in mental health illness claims being paid out.
Super Consumers Australia's Xavier O'Halloran noted it was a more complex area than physical disability, with many funds placing unnecessary barriers and burdens of proof.
"We're seeing a massive increase in the number of mental health claims coming through to superannuation funds," he said.
"We're also seeing big claims delays too.
He said while the insurance industry has now acknowledged a crisis with mental health-related TPD claims, the corporate regulator warned the industry over four years ago to expect this to happen.
While some people prefer to take out insurance cover outside of their super, most superannuation funds provide TPD and death cover to eligible workers between the ages of 25 and 65.
Some provide this automatically as part of their default cover, while income protection is opt-in in some funds.
The amount paid out by a company in the event of a TPD benefit claim can vary, but the average is $144,000, according to data from the Australian Prudential Regulation Authority (APRA).
It takes, on average, 3.8 months for TPD claims made through superannuation to be finalised.
But APRA's data does not break down what percentage of TPD claims are for mental health illness and it is unknown how many of the rejected claims relate to mental health.
Insurance lawyer Patrick Williamson-Hill said there has been an "unprecedented spike in mental health claims especially post the pandemic".
Mr Williamson-Hill, a senior associate at Berrill & Watson, observed the biggest reason why claims drag on for beyond six months, up to more than a year, is because Australians often cannot afford to access psychiatric help.
"Insurers want to see that people have had some treatment before deciding whether they are TPD within the meaning of the policy."
Mr Williamson-Hill said metal health claimants are a very vulnerable subset of claimants within TPD policies, and may be dragging out the average delays across TPD claims generally.
"But a lot of that depends on whether or not that person has been able to access psychiatric treatment."
Mr Williamson-Hill noted that when people are claiming TPD through their superannuation, "it's often their only financial lifeline".
He has argued there needs to be mandatory time frames in which super funds respond to claims.
Corporate watchdog, the Australian Securities and Investment Commission (ASIC), has undertaken several reviews of TPD claims processing.
In a March 2023 review of insurance in super, the regulator found that three in four mental health-related claims are declined, under "activities of daily living" (ADL) tests.
ADL tests assess whether a consumer can perform basic activities, such as feeding, dressing or washing themselves.
The ASIC review looked at a sample of more than 26,000 TPD claims over a two-year period and found that 4 per cent were assessed under the ADL definition. Of these claims, 60 per cent were declined.
ASIC said mental health and musculoskeletal claims were roughly five times more likely to be declined under the ADL definition, compared to the standard "any occupation" definition — where a benefit is paid if a person is unable to engage in gainful employment in any occupation for which the person is reasonably qualified by education, training or experience.
The regulator concluded super trustees and insurers should review claims handling practices to assess whether they are fair and appropriate.
It found just four of 15 trustees regularly monitor data on the cause of claims, for example, whether they related to a musculoskeletal or mental health condition.
Consumer advocate Mr O'Halloran said super funds and insurers need to pick up their game and process claims faster, as poor claims processes and unnecessary burdens of proof risk exacerbating people's mental health conditions.
"At the moment, we have all these kind of restrictive requirements in the claims process — for example, that someone be seeing a psychiatrist, and receive ongoing treatment in order to successfully claim.
"This is when we know there's a real shortage around the country and there are massive affordability barriers.
Mr O'Hollaran wants to see the introduction of mandatory customer service standards so insurers and super funds are required to deal with claims in a timely manner and not "drip feed and continue to ask for more and more data and put more and more obligations on people who are experiencing a mental health condition".
While retail insurers already fall under a Life Insurance Code of Practice, he argued this needs to be extended to include superannuation funds.
The Code specifies that with income-related benefits, a decision should be reached within two months of the date the claim was received, or the end of any waiting period specified in the policy.
For lump sum claims, a decision must be made within six months of the date the claim was received, or the end of any waiting period specified in the policy.
Mr O'Halloran noted that in 2018 the Productivity Commission recommended a review of insurance in super — "that is still on the government's to-do list".
"We'd like to see the assistant treasurer act quickly to improve the lives of Australians who are out of work due to mental health conditions," he said.
The federal government recently put super funds on notice that they need to lift their game when it comes to claims processing.