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On 1 July 2019, a raft of new super changes are expected to come into effect. They are primarily designed to protect younger workers and those with low account balances.
To stop the superannuation accounts of vulnerable Australians being eroded by life insurance premiums, a number of changes are set to come into effect on 1 July 2019 as part of the Treasury Laws Amendment (Protecting Your Superannuation Savings Package) Bill 2018.
Under the proposed rules, MySuper and choice of fund members will need to deliberately opt-in for life insurance inside super where:
- They are under age 25;
- Their account balance is less than $6,000; and
- Their account has not received a contribution for 13 months.
This is a significant change from the current opt-out model where fund members automatically get a level of cover.
Based on the Bill, which is currently before parliament, the proposed changes will affect all arrangements except self-managed superannuation funds (SMSFs), Australian Defence Force (ADF) arrangements, and defined benefit arrangements.
There is no specific exemption for insurance-only superannuation funds, such as LifeSolutions Super.
Based on the current Bill, trustees of most superannuation funds will be required to contact affected fund members to ask them if they still want life insurance in superannuation.
They must write to the affected member by 1 May 2019 to inform them of the following:
- The fund will not provide the member with insurance cover from 1 July 2019;
- Cover can be maintained if the member elects to do so; and
- The method for election.
Trustees will need to demonstrate that a member has elected to maintain life insurance cover, either in writing, by a record of a meeting, or a note following a telephone conversation.
How will ‘inactive’ clients be affected?
One strategy that is sometimes recommended to clients is to open or maintain group life insurance inside an industry or retail superannuation fund to get a level of cover.
This ‘set and forget’ strategy is at risk under the proposed legislation because trustees are required to obtain confirmation from inactive account members that they still wish to retain life insurance.
If the member (client) in this situation does not ‘opt-in’ then the life insurance inside the superannuation fund must be cancelled. This provision applies regardless of the amount of assets that are remaining in the fund, and it applies to both choice and MySuper arrangements.
Importantly, elections made prior to 8 May 2018 (Budget night) are not deemed to be effective on, or after, 1 July 2019.
How will younger clients and those with low account balances be affected?
Written direction by a member, who is either under 25 or who has a balance of less than $6,000, to opt into insurance will be valid indefinitely unless the superannuation account subsequently becomes inactive. An election to opt-in to insurance cover by a member who is under 25 will be taken to satisfy the opt-in requirement for low balance accounts, and vice versa.
Members with superannuation account balances of less than $6,000 who made elections prior to 1 April 2019, will be deemed to be effective on 1 July 2019 and will not need to be provided written notices. Elections made prior to the 8 May 2018 will also be effective after 1 July 2019.
Where financial advisers have provided advice to clients (members), and clients have completed application forms and underwriting requirements, this will be deemed to satisfy the requirements under opt-in for members who are under age 25 or who have less than $6,000 in their superannuation account. This will be the situation for most LifeSolutions Super clients.
In summary, clients who want certainty regarding their life insurance cover inside superannuation should see a financial adviser. Obtaining personal financial advice and being individually underwritten appears to satisfy the opt-in requirements that commence on 1 July 2019, for clients under age 25 and those with balances under $6,000. Opt-in insurance requirements still apply to everyone who has inactive accounts for 13 months or more.
This information is current as at October 2018. This article is for adviser use only and is intended to provide general information. While all care has been taken to ensure the information is accurate and reliable, to the maximum extent the law permits, ClearView and its related bodies corporate, or each of their directors, officers, employees, contractors or agents, will not assume liability to any person for any error or omission in this material however caused, nor be responsible for any loss or damage suffered, sustained or incurred by any person who either does, or omits to do, anything in reliance on the information contained herein.