How to protect your super

Bruce Brammall, 12 June, 2019, Eureka Report

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SUMMARY: Time to do an urgent stocktake of your personal risk insurance – particularly whatever you’re holding in super.

Billions of dollars of insurance was automatically cancelled at the end of the financial year. Bizarre, but true.

The government-imposed mass extermination of insurance policies hit on 1 July.

The insurance is gone. If you still need the cover, you’ll have to reapply. And that’s the case, I hope your health hasn’t changed.

The mass cancellation relates to insurance taken out through superannuation, so will impact many policies for life, total and permanent disability (TPD) and income protection (also known as salary continuance).

And it’s come about as a result of a government program called “Protecting Your Super”. This is about cancelling what the government has deemed to be “unwanted” policies attached to super funds, that often come about as a result of “automatic cover”, when joining a super fund. I’ll come back to what qualifies as, essentially, unwanted insurance shortly.

But it’s not all unwanted, automatic cover. A good portion of it was deliberately taken out by members, but is cancelled nonetheless.

 

Most super funds had written to potentially affected members in the last one to two months. Super fund members have been informed that they were about to lose insurance attached to their super fund, unless action was taken.

The letters, largely, gave options for keeping the insurance. This might be to write them a signed letter to say that you want to retain the cover, or to make a contribution to your fund, which would reset the timeclock (which runs for 16 months) on your cover being kept.

Why is this happening?

Under rules known as “Protecting Your Super”, the government announced that it would move to cancel insurance policies under certain circumstances, largely for those super funds that fall under the definition of “inactive accounts”.

These included:

  • Where no contribution has been made to the fund for 16 months
  • Where no rollover has been received for 16 months.
  • Where balances are below $6000.

The responsibility was on super funds themselves. They needed to report to the Australian Taxation Office, twice a year, on funds that meet these criteria.

If those funds became inactive, the insurance would be stripped off the accounts and the money, eventually, transferred to the ATO, which will use data matching (largely by tax file numbers) to try to find a home for the super with another one of your funds.

I’m not sure what happens if you don’t have another super fun but the insurance will be lost.

Why this is important

You might well have kept an super fund open, specifically for the purpose of holding on to life, TPD or income protection insurance. But largely, specifically, for that reason.

You would rather have your money invested elsewhere (such as in a self-managed super fund), but you want that insurance where it is.

This could be for a large number of very personal and legitimate reasons.

You’ve opened a SMSF and have rolled over most of your money to that. However, you kept a previous APRA super fund open for the insurance, because it was cheap, or because you have suffered health issues that would make taking out new insurance impossible, expensive, or with conditions (known as exclusions). Or it might be several super funds with insurance.

You might have kept a low balance in those super funds, because you were literally just keeping enough money there to pay for the insurance.

You might have applied for insurance before moving super funds, to find out that you couldn’t get any on suitable terms. So, you deliberately kept that other fund open.

One person I know, at the time they were considering applying for insurance, had recently suffered from breast cancer. Because of the cancer, she wasn’t going to get cover anywhere. However, she had three APRA funds that had, in total, about the level of cover that she needed, which was about $800k of life and TPD cover. Because of her age (sub-30), none had a particularly large balance, but she knew that she needed to keep those funds open to retain that cover for her family and herself.

A client of mine also had a near miss with an earlier version of this program. The ATO wrote to her and suggested that she “sign here” and they would roll over an inactive account to an active account. Which she duly did.

The problem was that the “inactive” account had nearly $900,000 of life and TPD in the account. We were notified of this, as it happened, and managed to have the whole process reversed. A month later, she was given two to five years to live. She died about 15 months later. Had it not been for quick action, her husband would have missed out on $900,000 for himself and his teenage children.

I’ve met a lot of readers over the years. And I know that a lot of trustees with SMSFs have kept insurances outside of their SMSFs, often with small balances, or $10,000 or less.

 

Lawsuits are coming

Plenty of them – from widows/widowers and their children, plus those who have been injured or fallen ill.

It is an absolute certainty that someone (many) will miss the paperwork on this. It could be the super fund itself. Or more likely, the individual member. Possibly a financial adviser.

Imagine if someone dies in July or August, just after their life insurance policy has been cancelled. The husband thought the wife was covered. But paperwork was missed, ignored, avoided. There won’t be a life insurance payout for the widower and his kids. Whose fault will it be? There will be plenty of blame shifting, with lawyers likely to be the main winners.

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au .

 

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