The life insurance of self-managed super fund trustees who have opened APRA-regulated super funds to access this protection could be under threat, warns the SMSF Association.
Super funds with “inactive” accounts will have their life insurance switched off unless they specifically direct their fund otherwise – or reactivate their account – under new regulations expected to take effect from 1 July.
An inactive fund is one that has not received a contribution or rollover for 16 consecutive months.
SMSF Association chief executive John Maroney is concerned some SMSFs will lose their cover if they don't act quickly.
“This could have a devastating impact on policy holders or their beneficiaries, if their insurance cover is unknowingly terminated.
"Furthermore, it may be extremely difficult and costly to try and access insurance at a later stage," Maroney says.
The legislation is intended to protect inactive super fund members from having their retirement savings eroded by fees and premiums for default insurance, or paying for insurance cover they don't know about.
Maroney says affected SMSFs who wish to maintain their cover should do two things before 1 July 2019:
1. Give direction to their APRA-regulated fund that they wish to opt into life insurance; or 2. Make a contribution or a rollover into the APRA-regulated fund to reactivate it.
Trustees using the second option should still "opt-in" with their fund, Maroney says. APRA-regulated funds had until 1 April to identify members who have been continuously inactive for six months or more, and by 1 May had to inform them that they will lose their life insurance cover unless they opt in.
The Australian Securities and Investments Commission warned super fund trustees in April of the need to "implement the changes in a timely manner" and "communicate responsibly – their communications need to help their members".
"It is not appropriate for trustees to encourage all members to maintain insurance – many members with inactive accounts will be better off allowing the insurance to lapse," ASIC Commissioner Danielle Press said.
"Similarly, trustees should not be urging all members with low-balance accounts to keep their account within the fund as this may not be in the best interests of members."
The new rules stemmed from the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill.
Passed earlier this year, the bill introduced a number of initiatives to protect super savings from fee erosion, including putting a 3 per cent annual cap of administration and investment fees for funds classified as low balance – those with less than $6,000 – and banning all exit fees.
The bill also allows the Commissioner of Taxation to consolidate low or inactive superannuation balances, of which there were around 9.5 million in 2015-2016.
Funds with inactive, low balances will be transferred to the Australian Taxation Office, which will then match them to a member’s active account.
Every Australian who holds an account deemed inactive will be swept up in the new rules, not just SMSFs, says Fox and Hare financial adviser Jessica Brady.
The ATO estimates that more than 15.6 million Australians had a super fund account as at 30 June 2018 – and approximately 39 per cent have more than one account, on which they could be paying premiums on multiple insurance policies.
Some 70 per cent of Australians have some form of life insurance attached to their super fund, the Association of Superannuation Funds of Australia estimates.
Jeremy Cooper's 2009 Super System Review found that less than 13 per cent of SMSFs held life insurance.
Adviser Jessica Brady urges members to read the correspondence from their fund, understand what super and insurance coverage they have, and determine what insurance they need.
She also encourages members with multiple super accounts to consider consolidating their accounts.
Most superannuation funds offer members three different types of insurance through their membership:
death covertotal permanent and disability coverincome protection cover.
Insurance within superannuation is paid for with pre-tax dollars. Other benefits of this approach, according to ASIC, include affordability, ease of access, and insurance without health checks.
Potential drawbacks include limited cover, issues around multiple accounts with multiple insurance policies, and slower payouts in the event of claims.
By Emma Rapaport - Emma Rapaport is a reporter for Morningstar.com.au
12 June 2019