Insurance in super: the impact of proposed changes

Camphin Boston | August 2019

There are new rules on the way that will require young adults and members with low super balances to actively “opt in” to holding insurance in super. If you’re in either of these categories, or perhaps have adult children in the workforce, now is a good time to ensure you understand the issues around insurance in super, and to consider what steps you, or your children, should be taking to protect future retirement benefits.

You may not spend much time thinking about the insurance in your super fund, but have you considered how much that insurance is costing you and whether it meets your needs?

The government is concerned that many Australians are paying for inappropriate insurance policies in their superannuation accounts that are gradually eroding their retirement savings. The long-term effects can be particularly serious for young people and those with low balances. The problem tends to arise where members:

  • are not aware they are signed up for insurance, or don’t realise the cost of premiums;
  • have duplicate insurance policies across multiple accounts; or
  • are over-insured for their needs.

One of the major causes is “opt-out” insurance. Many funds offer insurance to new members automatically, and the member must actively opt out if they don’t want the coverage.

Earlier this year, the government passed measures to protect “inactive” accounts (ie those that have not received any contributions or rollovers for at least 16 months) so that super funds may not provide insurance to these inactive members, unless the member specifically directs the fund to do so.

Now, the government is taking its reforms further to protect certain active members. Under proposed new laws slated to take effect from 1 October 2019, super funds (other than SMSFs and small APRA funds) will be prohibited from providing insurance on an “opt-out” basis to:

  • members aged under 25 years who are starting a new account; and
  • members with balances below $6,000, including existing member accounts (meaning those with an existing low balance will lose their coverage unless they elect otherwise).

In both cases, the member can “opt in” to insurance at any time. And once the member reaches age 25 and has an account balance of at least $6,000, the restrictions on opt-out insurance fall away. (This means, in particular, that “MySuper” products will be required from this point to provide opt-out insurance for death and total and permanent disability, as is generally required by law for all MySuper products.)

Helping younger Australians

While the legislation hasn’t yet passed, it raises important issues for all young superannuation members.

It’s well known that young adults generally have lower levels of engagement than other Australians when it comes to super. Parents of adult children in the workforce can help their kids get on the right track by having some simple conversations about super:

  • Take stock: How many accounts do they have? What insurance is held in each fund? Young adults today are more likely than previous generations to change jobs often. If they end up with multiple super accounts, they’ll be paying multiple administration fees and potentially duplicate insurance premiums.
  • Talk about keeping super consolidated when switching jobs: If they already have a super fund, they probably don’t need to join their new employer’s default fund.
  • Do they work in a risky occupation? Perhaps they need income protection insurance more than other young adults.
  • Use major milestones as reminders: Life events like marriage, having children or taking out a mortgage on a first home are all events that should prompt members to review their insurance needs.

Remember, young adults can still opt for insurance under the proposed new laws, but will need to make a conscious decision to do so.

Have you reviewed your insurance recently?

Need to take stock of your super and insurance arrangements? Contact us to begin a discussion about your insurance needs and how we can help you achieve financial security for you and your family.

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