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Your key insurances could be about to vanish

Opinion

Thousands of Australians are sleepwalking into a scenario where they will no longer have life insurance, income protection and total permanent disability insurance, warns legal commentator Morry Bailes.

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Changes are imminent to our superannuation laws and, as the clock ticks over to “midnight”, many super fund members will find insurances they have kept up for years will disappear.

How did this happen?

Well, it’s not often that the Coalition and Greens agree to legislation at a federal level, but it happened in the case of the Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019, in a deliberate effort to thwart ALP amendments to the legislation.

What passed Parliament fell from a Productivity Commission report – Superannuation: Assessing Efficiency and Competitiveness – tabled in December 2018. No doubt there was some impetus created by the Hayne Royal Commission as well.

The ALP sought to amend the legislation to cut the super funds some slack, motivated one assumes by trade union interest in industry funds, but it was not to be.

Life insurance, income protection insurance and total permanent disability (TPD) insurance are commonly attached to members’ superannuation. While it may be a convenient way to get insured, it is also a great way for super funds to make money. The Productivity Commission and Parliament were concerned about the cost of what might be regarded as unnecessary insurance. For instance, does someone under the age of 25 years old need to be insured against these risks?

So what passed is legislation that reversed the opt-out system for those below 25 years, many of whom may be in lower paid part-time or casual jobs, and for those whose superannuation account balance is less than $6000. The rationale for the latter move is that as people move through their working life, smaller amounts of super may end up in a variety of accounts. In these cases, their balance can be eroded by the deduction of arguably unnecessary or unwanted insurance premiums contributions.

Under the legislation, contributors now need to opt in to insurance. If you don’t, the insurance policies will disappear. It is a convoluted process to get re-insured if you miss the opt-in timeline. The critical date is June 30 this year, although the insurance does not expire for another three months – October 1, 2019.

Who might find themselves in this position? Firstly it is common financial advice that if you start a self-managed super fund, you may wish to preserve a certain amount in a retail or industry fund precisely because you may wish to hang onto your insurances. If that was a deliberate decision, you ought to be aware that the downside or unintended consequence of this legislation is that due to the monetary balance of your fund or inactivity – or both – you may need to opt-in or lose your insurance benefits altogether.

Another category of person may be a contributor who hasn’t thought things through and may be unaware of insurance benefits that may exist in lost or “ghost” accounts. It may be that, after thinking about it, such a person may want to hang onto those insurances and choose to opt in.

Then there are those under the age of 25 who work in riskier industries, such as construction, who, despite the cost of insurance taken from their super fund balances, may be better off keeping their entitlements. Without opting-in, younger workers may be left out in the cold in the event of injury.

Unfortunately, there appears to me to be general ignorance of this issue, due to the swiftness of the passage of this law, the intervening federal election and little public messaging.

Of course, super funds have sent notices to those impacted, or ought to have done so, but it is very easy to overlook or misunderstand the notice.

The benefit of remaining insured is obvious.

Many people have life insurance, but many more may benefit from income protection insurance purchased on their behalf by a super fund that, in the wider market, may cost more, or be unattainable due to pre-existing health problems.

Similarly, many people are unaware that they even have TPD insurance and may even have an existing claim at risk of disappearing with the loss of the policy.

As a firm, we have written to all our clients and former clients to advise them of the problem. Questions should be directed to your super fund, financial adviser or, if you realise you may actually have a claim, your lawyer.

While the intent behind this legislation is largely sound, as with many amendments in law, the unaware could be disadvantaged by unforeseen consequences. It is not too late to attend to this, but you must do so urgently.

This should also serve as notice to everyone to take a look at your superannuation insurance policies and entitlements. There is not much point paying premiums for something you don’t understand or don’t realise you have, especially if you actually have a claim sitting there un-actioned.

You should add this to the myriad list of things that need to be finalised by June 30.

Happy end of financial year.

Morry Bailes is managing partner of Tindall Gask Bentley Lawyers and immediate past president of the Law Council of Australia.

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