Treasury is consulting on the impact of adopting universal definitions, terms and exclusions for default life insurance in superannuation.

It wants feedback on which insurance areas will benefit most from standardisation and to what extent it will affect premiums.

The Government says standardising terms will push super funds to compete more heavily on price, benefits and the claims handling process.

It wants to know if premium impacts can be reduced without encouraging the creation of junk policies.

The benefits of standardising insurance terms and definitions depends on which ones are standardised and to what extent, the consultation paper says.

Some funds have argued that standardising total and permanent disability (TPD) definitions will result in higher premiums, because they have tailored cover to their members through changing the definition of TPD.

A Productivity Commission report found some funds tailor coverage to improve its value in super. Standardisation would affect that, Treasury’s consultation paper says.

Setting prescribed levels of cover will not lead to similar premium levels, due to different demographics in each fund, it says.

The Hayne royal commission was critical of insurance contracts’ opaque nature, saying they are difficult for the average consumer to understand.

“Subtle differences in definitions, terms and exclusions from one policy to another can make the task of comparing policies particularly challenging,” the Hayne report says.

Beyond requiring a minimum level of life cover, super trustees currently have broad discretion to determine the offering provided, leading a wide variation in default coverage.

Submissions close on April 26.