Insure that you have ‘opted in’

Bruce Brammall, The West Australian, 14 May, 2018

It sends a shocking message when the government says “you don’t need insurance”.

That’s not precisely what Treasurer Scott Morrison has said. But his Budget-night release for plans on insurance in superannuation is certainly going to give off that impression.

Super funds will be stopped from automatically charging insurance cover for individuals, under certain circumstances.

If you’re under 25, you will no longer be given automatic insurance cover when you join a fund. You’ll have to “opt-in”. That will mean ticking a box to say yes, you want it, signing it and sending it back to the super fund.

If you don’t, you won’t get that automatic, non-underwritten, base-level insurance cover.

Also, if your balance falls below $6000 or your super fund hasn’t received a contribution for 13 months, you will also need to opt-in to keep your insurance.

Oh, there are so many potential problems here. It’s scary.

You moved house and didn’t receive the opt-in letter. Australia Post simply failed to deliver (as seems to be increasingly the case). You didn’t opt-in at 25, and 10-years later with a five-year-old child, you die, leaving your mother (the child’s grandmother) to raise your baby.

The reason the government has gone down this path is that it believes it will add many billions of dollars to Australians’ super balances.

And no doubt, it will.

But at what cost to those left behind when catastrophe strikes?

The sell job is a little unbelievable.

“Based on the most recent data,” the Budget night papers said, “around 5 million individuals will have the opportunity to save an estimated $3 billion in insurance premiums by choosing to opt-in to this cover, rather than paying for it by default.”

They’re suggesting that “you” don’t have “the opportunity” to opt out now. You do. You can always cancel an insurance policy. It’s pretty simple.

(It’s also, bizarrely, saying that you would save money by choosing to opt-in. But, really, you’re only going to save money if you opt out.)

Their point is people are defaulted into this cover and might not need or want the insurance. (Probably true for the under-25s. Probably not for those over 30.) But are also not really exercising their choice to reject it.

Do people need insurance before the age of 25?

My answer is, actually, “generally no”. Some might. But by 25, most people haven’t partnered off, haven’t incurred significant debts, don’t have children and aren’t usually earning a reasonable amount of money.

That has often changed by 30. And for most, certainly by 35.

By 35, you generally do need insurance. If you’ve married, got a mortgage and a few tin lids running around, you might well need a hell of a lot of it – perhaps a million dollars or more.

The real advantage of the current opt-out system is that base level of cover, should you die, that you get to leave your partner and kids.

In a similarly disturbing announcement, the government is going to allow the Tax Office the power to consolidate super funds proactively.

This means they will use tax file numbers to shut down small accounts, or inactive accounts, by decree and move the money to other accounts.

It estimates this will clean up about three million super accounts and hand back $6 billion to active super accounts.

This sounds great in theory.

But personal experience tells me it can be an unmitigated disaster. It nearly cost clients of mine $900,000.

The ATO wrote to my client and said “sign and return this and we’ll consolidate Fund A into Fund B, because you haven’t had any contributions go into Fund A for a long time”.

Believing the ATO would only act in her best interests, she duly signed it and returned it, without thinking.

However, Fund A had $900,000 of life insurance in it. And she died a little over a year later.

Thankfully, we had the decision reversed before it was finalised. And her widower received the $900,000 when his wife died, which will allow him to continue to raise his daughters as had been planned.

Sure, ScoMo’s announcements will probably, overall, make for a bigger, stronger, superannuation system.

But there will be people who lose out. And it will be those who are at their most vulnerable – partners and children of a parent who has just died.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial advisor and mortgage broker. E: bruce@brucebrammallfinancial.com.au.