New Super Rules for Life Insurance

Russell Cain Updated: 28 January 2020

You recently might have received an email from your super fund
warning you that your life insurance will be cancelled because your
account is inactive.

Millions of Australians have insurance inside
their superannuation. You probably have life insurance, TPD cover and
perhaps even income protection insurance (salary continuance cover) in
your super fund.

To protect fund members from inappropriate insurance coverage and having their retirement savings diminished, the Australian government has recommended several new superannuation changes. Some of these recommendations have now been legislated and comes into effect on the 1st of July 2019.

What to expect from July 2019 superannuation reforms?

From the 1st of July 2019, super funds will cancel insurance on accounts that have been inactive for the past 16 months and have a balance below $6,000. On the 1st of April 2019 trustees were told to warn members via email of these new changes to the Super law.

New super rules for life insurance

If your super balance is under $6,000 and has not received a contribution or rollover in the last 16 months, then it is deemed inactive, and your default life insurance will be cancelled. Super trustees must transfer all inactive super accounts to the Australian Taxation Office (ATO), where they will endeavour to consolidate it with your active super funds. Fees will be capped at 3% per annum for account balances under $6,000, to help make sure unnecessary fees and charges don’t diminish your fund. No exit fees will be charged when changing funds (for all accounts) to encourage consolidation of funds.

Proposals that won’t be implemented

The recommendation to allow super fund members under the age of 25, with a super balance below $6,000, to opt-in instead of having to opt-out of default life insurance was dropped from the legislation. The proposal is said to be anticipated in a separate bill, but has not yet passed.

How to prepare for the superannuation insurance changes

If you have a small, inactive fund, these government changes to superannuation might affect you.

Check what type and level of cover you have inside your superannuation. Contact your fund directly or access your account online and review your annual statements. If you want to keep your default insurance, you need to contact your super fund OR have a contribution or rollover made to your fund before you reach the 16 months of inactivity. Review your insurance inside super annually to make sure it still suits your requirements. You can change or cancel the insurance you have inside your fund at any time by contacting your superannuation fund.

What is Australian super default insurance?

When joining a government-approved superannuation fund, you’ll usually automatically receive life insurance bundled with TPD cover. Insurance premiums will be deducted from your super contributions. You’ll generally receive a welcome pack within 30 days after joining the fund.

The death benefit generally pays a lump sum amount to your nominated beneficiaries in the event of your death or diagnosis of a terminal illness. TPD cover inside your super fund provides a lump sum benefit when you are totally and permanently unable to work, because of an accident or illness, in any occupation suited to your education, training or experience. Income protection might also be included in your super fund. Income protection provides you with a monthly benefit when you are deemed temporarily incapacitated and unable to work due to a sickness or injury.

If you do not want this default insurance cover, you must proactively opt out of it by contacting your super fund.

Does my super have life insurance?

You might have life insurance inside your super fund. If you don’t know whether you’re paying for default insurance through your super fund, you can call the fund directly or check your annual super statement by accessing your account online.

Is life insurance compulsory with superannuation?

While it’s not mandatory for you to have life insurance inside your superannuation, it is generally automatically included by default once you join a super fund. However, Self-Manages Super Funds (SMSFs) trustees are required by law to consider insurance for its members, as part of their investment strategy.

Benefits of default group insurance inside super

Generally, the main advantages of having a group life insurance policy through your super fund are typically:

Convenience, Cheaper premiums, and Automatic acceptance.

However, default insurance inside your superannuation might not be suitable for your unique requirements, especially if you’ve experienced a significant life event. For example, getting married or divorced, having children or retiring.

Contact a broker to help you determine whether the type and level of coverage you have inside your fund are sufficient to protect you and your family should something happen to you.

Disadvantages of Australian super default insurance

For many employees, it doesn’t always make sense to participate in group insurance when a self-owned policy could be cheaper and more specific to your requirements. For example, when you’re in your 20s and have no dependents or barely earn enough money to make ends meet.

Possible disadvantages of having life insurance automatically added to your superannuation include:

You typically won’t find the range of policy options that are available with individually bought coverage. Premiums paid from your super fund could diminish your retirement savings. Trauma cover is no longer available through super. Income protection inside your super fund generally has fewer benefits than when held outside of super. It is also harder to claim because you’ll need to meet the insurance policy’s conditions of a claimable event and the fund’s conditions of release before the benefits are paid to you Your level of cover is usually limited and might not be enough to protect your loved ones financially should you pass away. If your nominated beneficiary is not a tax dependent, they might have to pay taxes on your death benefit. Claiming insurance through super can take a lot longer because you’ll need to satisfy the insurer and the fund’s condition of release.

When deciding whether to purchase life cover inside or outside your super fund, you might want to compare the cost and level of coverage provided.

Can members opt out of life insurance inside super?

Yes, you can cancel your insurance at any time. Reasons you might want to opt-out of automatically added super insurance, include:

You’re young and healthy without financial dependents. You don’t want your retirement savings diminished by premiums. The insurance type and level of coverage are not suited to your requirements. You already have enough life insurance elsewhere. You want more tailored insurance options.

Important: If you do opt out of your default insurance, it’s unlikely that you can opt back in. Make sure you have appropriate cover in place before cancelling or minimising the cover you currently have inside super.

Alternatives to group life insurance inside superannuation

Purchase insurance directly: Buy insurance directly from the insurance company. Generally, no involvement or advice from a broker. It’s up to you to gather and compare quotes. Buy insurance through a broker: Insurance can be purchased through a life insurance broker or comparative website. You’ll have the benefit of a specialist helping you find the right type of cover for your requirements, at a price you can afford.

Before you decide whether to keep or opt-out of your insurance provided through super, carefully consider your circumstances and that of your loved ones.