By Trevor Geffin
We are writing this article to inform you of a very important legislative change that is being made to insurance within superannuation from 30 June 2019.
Whilst you may or may not have insurance, have a need for it, or be interested in it, it is still important to read this email as people have until 30 June 2019 to act. This is because loved ones such as children, family, friends or business partners may have insurance that could be cancelled without their explicit knowledge and consent. An event that leads to an insurance claim has far reaching financial consequences on many people and not just the impacted person. Therefore, we feel it is important that everyone is informed about these changes so that they can encourage others they are connected to financially to engage with the issue as they may have slipped through the cracks.
The concerns raised in this newsletter have also been widely reported in the media in order to bring attention to the issue:
Whilst there are many merits to the measures i.e. some people genuinely don’t need cover; the premiums erode their super unnecessarily; and they were automatically opted in without their knowledge to name a few. However, the decision to cancel should sit firmly with the individual after they have obtained informed consent, considered whether they need insurance, and the consequences of cancelling. They may even choose to get some professional advice to help them through the decision.
Nonetheless, this will be happening on 1 July 2019 and its best each person understands their position, considers the consequences, and responds to their communications from their insurer/super trustee.
What is happening?
From 1 July superannuation trustees are required to cancel insurance if it is linked to a super account that has been inactive for a continuous period of 16 months.
What is an inactive account?
An inactive account is one which has not received any contributions for 16 months. Sadly, as reported by the SMH, only 6% of the 220,000 members contacted by Australian Super have responded, meaning many who need cover will be losing it, either through apathy or simply by not reading communications.
Are Self Managed Superannuation Funds impacted?
No. Self Managed Superannuation Funds are not impacted by this legislation
In what circumstances could your default cover be valuable?
A person may have received default cover when they opened up a superannuation fund and may have any of Life, TPD, or Income Protection insurance that was automatically given to them. Through apathy or ignorance, it may be that a person requires insurance, but doesn’t have any as they have simply never looked into it or engaged with the issue. If an adverse event happens to them (death, disability, disease), then their existing cover (which they may or may not know they have) could be very valuable indeed. Default cover also does not assess your health, which means it is unlikely it has exclusions or loadings. Finally, many people took out other policies and used their existing default cover as part of their overall insurance plan. If this cover automatically cancels then the overall plan could become severely compromised.
One of our Directors has retained some of his default cover because if he applies for Income Protection he will receive an exclusion for spinal injuries. This is because it is a pre-existing condition. The default Income Protection cover provides insurance for his pre-existing condition as it was “automatically accepted” when the fund gave him the insurance i.e. his spine was not assessed and excluded as a pre-existing condition.
We recently assisted a 28 year old who had a severe brain haemorrhage, is permanently disabled and unable to work. She had $800,000 of TPD cover that she didn’t know existed until we advised her to conduct a lost super search. It is likely under the new rules she would have not been insured as she was disengaged with her superannuation. This cover is going to make an enormous difference to her life.
We have many clients who have two Income Protection policies. One they received by default with a 2-year benefit period (only pays you for 2 years) and a second one we facilitated for them with a 2 year waiting period (starts after 2 years) and an age 65 benefit period (may pay you until age 65). This strategy ensures that if you become disabled long-term i.e. longer than two years, as the one policy ends, another one starts and continues potentially for the remainder of your working life. As you can see if the first policy were to be cancelled by this change, you could be without cover for two years if you don’t make alternative arrangements.
What do you do if you are impacted?
Your superannuation trustee is legally obliged to write to you to inform you that you have been impacted and this is where we feel the problem is going to occur. This is because many people have been written to, have either not opened their emails, checked their mail or responded to the letters (see the 6% response rate to Australian Super). The letters would have had an explanation and an explicit opt-in notice with instructions on how to opt in. If you do not opt in then your insurance could be cancelled. Many insurers and super funds also don’t have their members correct contact details.
What happens if your cover cancels?
If your cover cancels you will need to re-apply if you want it back. This may result in you having to go through the underwriting process again (where your health will be assessed), which can result in you being unable to obtain new cover at all or you may have loadings/exclusions applied to your new cover. This will happen if your health has adversely changed, which we all know is common as time progresses. This is one of the significant risks of this legislation and will undoubtedly disadvantage thousands of people. Alternatively, you will have to pro-actively obtain new default cover if available.
In what circumstances don’t you need cover?
Your superannuation may have any of Life, TPD or Income Protection insurance.
If you are single, have no dependants, no debt and pristine health then it is unlikely that you will need Life cover as you are not protecting any financial risks. Any Life insurance proceeds would simply be a windfall for your beneficiaries should you unexpectedly pass away.
TPD insurance is a relevant consideration throughout ones working life. This is because if you get totally disabled, you will lose your ability to earn income whilst still being alive, so without adequate financial resources you will become someone else’s problem i.e. either the State or your family. However, TPD in superannuation is always the weaker “Any Occupation” definition (which has a lower probability of claim) and this may not be appropriate for many occupations. One requires advice from a professional in relation to obtaining the correct TPD definition.
If you earn an income, your future earnings is most likely the most valuable asset that you have, particularly if you are young. We feel that most people who have an income to protect, should protect it. Unless you have significant financial resources that can generate you a passive income should you be unable to work again, Income Protection is relevant for you. Income Protection should be one of the first types of insurance you obtain in your life. It always amazes us that people insure their $20,000 vehicles, home contents and wedding rings before their lifetime earning capacity, which can be valued at millions of dollars. Ordinarily default Income Protection only has a 2-year benefit period and benefit periods of up to Age 65 are available too. Once again one needs advice from a professional about selecting appropriate Income Protection features.
Please check your email and mail, your superannuation trustee would have attempted to contact you. Also check online that your superannuation trustee or insurer actually have the correct contact details for you. If you are concerned and have not received correspondence, contact your insurer or your super fund. It is your responsibility and the responsibility your superannuation trustee to ensure an appropriate outcome.