Changes to insurance in superannuation – members beware!

Super law is always changing, and recent changes resulting from the Hayne Royal Commission have important implications for people’s insurance.

The changes particularly affect:

• members who don’t make any contributions for a period of 16 months;
• members aged under 25 years; and
• members with a super account balance of less than $6,000.

Essentially, the changes means insurance through super becomes available only on an opt-in basis – rather than an opt-out basis.  For people who already have insurance, there are important steps to take to make sure that insurance continues.

Existing rules relating to inactive accounts

Changes to super law earlier this year[1] mean that funds must not provide members[2] with insurance if:

• the member’s account is inactive for a continuous period of 16 months; and
• the member has not elected in writing that they be provided with an insurance product.

Those funds must provide members with insurance inactivity notices when their accounts have been inactive, alerting members that if their funds continue to be inactive then that insurance will cease to be provided.

More changes are now proposed

The proposed legislation[3] means that super funds must not provide members with insurance if:

• the member has a super account balance of less than $6,000;
• the member has not had an account balance with the fund on or after 1 July 2019 that was equal to or more than $6,000; or
• the member of the fund is less than 25 years of age,

unless the member has elected in writing that they be provided with an insurance product.

In respect of existing members, the fund must provide written notice if the member has a super account balance of less than $6,000 which states that after 1 October 2019[4] insurance will not be provided to the member unless the member elects to have insurance.  However, if the member has already elected to have insurance the super fund does not have to provide the notice.

Rationale for the changes - stopping the erosion of super savings

The rationale for the changes is that members with low balances, members under 25, and members whose accounts are inactive for long periods often have their super savings eroded by insurance premiums and fees charged by their super fund, as insurance provided as a default product will often be inappropriate for the member and therefore provides no real value.

What should members do in response to the changes?

Members should keep an eye out for correspondence from their super funds asking them to opt-in to insurance arrangements, particularly if they are self-employed and not making regular contributions to their super or are on a leave of absence/parental leave.  These members may lose insurance benefits they wish to retain.

What do the changes mean for my SMSF or super arrangements?

The above changes don’t affect super funds with fewer than 5 members (ie SMSFs).

However, the changes are still material in circumstances such as those set out below:

1. Insurance is easier to organise through a public fund.

If a person has set up an SMSF and rolled over most of their savings to that SMSF from their public offer fund, often the member will leave a small balance in the public offer fund so their insurance arrangements continue. 

The member may leave enough funds behind to pay the premiums for a period (and may not make regular contributions as a result).  However, under the above rules this insurance could be cancelled if the member did not opt in on receipt of a notice from their public fund.

2. Existing insurance can be really important for people diagnosed with health conditions.

Following the Hayne Royal Commission much has been written about the flow of funds out of retail super funds into industry super funds. 

However, as in the example above, people will routinely leave a small balance behind to continue insurance coverage – including where, the person developed an illness since originally obtaining insurance cover, which would mean that they can no longer take out that insurance in their new fund.

Again, it is essential for people in these circumstances to advise the fund with their existing insurance that they wish that insurance to continue.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics

[1] Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019; Treasury Laws Amendment (Protecting Your Superannuation Package) Regulations 2019.

[2] These rules don’t apply to all super fund members: eg defined benefit members.

[3] Treasury Laws Amendment (Putting Members’ Interests First Bill 2019.

[4] As the Bill is still before Parliament this date may change.