Crissy Demanuele is a member of the BT Product Technical, Life Insurance Team. She has a strong background in insurance, taxation, superannuation (including SMSFs), social security, estate planning and aged care.
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This article examines the recent changes to superannuation and how these changes affect insurance held inside superannuation.
The Protecting Your Super (PYS) Package legislation includes a number of measures to help protect super fund members’ retirement savings from erosion from unnecessary fees, and unknown or unwanted insurance premiums.
However, the measures do mean members need to review their current situation and make an informed decision. If they do not ‘opt in’, members who hold insurance cover within super accounts that are deemed inactive will have their policies cancelled.
Under the PYS measures:
the total amount of administration fees, investment fees and indirect costs must be capped for super accounts with low balances;
all inactive super accounts with low balances, where no insurance cover is attached, must be transferred to the Australian Taxation Office (ATO) as unclaimed money; and
insurance cannot be held within certain super funds where the member’s account has been inactive for at least 16 months, unless the member opts in.
In the past, under the MySuper laws, the provision of Term Life and total and permanent disability (TPD) insurance within super has been provided on an opt out basis, while income protection (IP) has been provided on an opt out or opt in basis at the trustee’s discretion. For this reason, many super fund members have been automatically provided with insurance upon joining a fund.
With effect from 1 July 2019, as part of the PYS changes, super trustees are no longer able to offer insurance on an opt out basis, if a member’s account has been inactive for a continuous 16-month period.
This article provides further detail on the insurance measures and what this means for clients who hold cover inside superannuation. It also explains the history behind the measures and proposed further changes which may come into effect in the future.
History of the legislation
In the 2018 Federal Budget, the Government proposed that, from 1 July 2019, super funds would not be able to provide insurance under an opt out arrangement for:
new members under age 25;
members who have a balance of less than $6,000; and
members who have an inactive account for at least 13 months.
On 12 March 2019, the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 was enacted. The final bill stripped out two-thirds of the originally proposed legislation and, under the law which was enacted, the new rules only apply to those members with accounts that are inactive for at least 16 months (instead of the originally proposed 13 months).
unless the member makes an election to hold the insurance.
This particular bill lapsed on 11 April 2019. However, it may be re-introduced. Although the expectation is that the bill will be introduced, it is unclear what it will look like and what commencement date will apply.
Do the new measures apply in all cases where cover is held inside super?
The PYS measures do not apply to:
self managed super funds (SMSFs);
defined benefit members, Australian Defence Force Super members, and members in registered superannuation entities with less than five members; and
funds where employers are contributing the super guarantee (SG) amount, or above, into the particular super fund.
The employer-sponsor contribution carve-out applies for a quarter (beginning on 1 January, 1 April, 1 July or 1 October) to a member where the insurance premiums attached to their account are covered by an additional contribution made by their employer if:
an employer-sponsor notifies the trustee of the fund in writing that the employer-sponsor will pay insurance fees relating to the benefit, for the member;
the amount the employer-sponsor contributes to the fund for the quarter exceeds the SG amount; and
that excess is equal to or greater than the insurance fees relating to the cover for the quarter.
In practice, this exemption may not be very useful, as it may be easier for clients to opt in themselves. This employer-sponsor exemption was also included in the now lapsed Putting Members’ Interests First Bill.
When is a super account inactive?
A super account is considered to be inactive if the member’s super account has not received a contribution or rollover into the fund for at least 16 months. This applies to both accumulation and pension phase super accounts.
Grace became a member of the ABC Super fund on 1 January 2013. At that time, she rolled over $200,000 into the fund.
On 1 July 2015, Grace took out Term Life cover, which is held within her ABC Super account.
Grace made a contribution of $5,000 into her fund on 1 April 2018. If Grace does not opt in, make a contribution or rollover into this account by 1 August 2019, the super trustee will have to cancel her insurance.
If a contribution or rollover is received into the super account, this will reset the 16-month period.
Do all members have to opt in to retain cover?
Unless an exemption applies, a member of a fund with group or retail cover held inside their super needs to opt in, in writing, to retain their insurance cover held within the fund, if their account becomes inactive for 16 months or more. Otherwise, the super fund trustee must cancel the insurance at the 16-month mark.
A member can opt in at any time prior to their account being inactive for 16 months, including while their account is active.
Does the member have to opt in more than once?
Most super fund trustees hold the view that, once the member has opted in to hold insurance cover within that fund, they can retain the cover indefinitely, even if their super account becomes inactive for longer than 16 months in the future. APRA has announced that it supports this view and considers that an election to opt in continues until the member advises the trustee otherwise.
Do the new measures apply to insurance outside super?
As a consequence of the cancellation of super insurance policies under the PYS measures, any linked policies will likely be cancelled as well. This could include flexible linked policies held outside super that provide own occupation TPD cover, Trauma cover (otherwise known as Living Insurance), or Income Protection plus benefits. In addition, children’s benefits that are linked to policies inside super may be cancelled.
Obligations for relevant super funds
In addition to having to cancel insurance arrangements whereby a member’s account becomes inactive for at least 16 months for members who have not opted in to retain cover, relevant super funds must also provide an inactivity notice to members when the fund has been inactive for nine, 12 and 15 months. The inactivity notice must be provided within two weeks of the nine, 12 or 15-month deadline.
The trustee is also required to notify members who have opted in how they can cancel their insurance.
Janine has been a member of a super fund since 1 March 2017. She took out Term Life, TPD and Income Protection insurance within her fund on 1 October 2017.
She made a contribution into her super account on 1 March 2019 and has not made any further contributions or rollovers since. She also has not opted in to retain the insurance cover within her super fund.
By 15 December 2019, the super fund must send her an inactivity notice to advise her that her account has been inactive for nine months. Janine will also receive subsequent inactivity notices if her account remains inactive for 12 and 15 months.
Which clients are most at risk at having their insurance cancelled?
Many clients take out insurance within a super fund where they have an account balance high enough to cover the cost of the insurance premiums. In these cases, these clients do not make contributions or rollovers into the fund.
Where a client has taken out such an insurance policy (especially prior to 8 May 2018), and thereafter does not make contributions or rollovers to the fund, and their employer does not contribute to the fund, their insurance may be cancelled if they do not opt in to retain the cover.
How does this impact Master Trust (insurance only) super funds?
When clients hold insurance within a Master Trust, the insurance premiums need to be paid more often than every 16 months, otherwise their insurance will lapse. This is because there is no accumulated super balance to cover the cost of the premium.
Therefore, for example, for members with an annual rollover funding their insurance, their account should never become inactive for at least 16 months, and should therefore never be at risk of losing their cover – as long as the rollover continues to be made regularly.
However, clients with this arrangement may still receive an inactivity notice when their account is inactive for nine months and 12 months. Once the client makes a contribution or rollover into the Master Trust, the account will be considered to be active again.
The intention of these changes is to protect super fund members’ balances and reduce clients’ super accounts being eroded unnecessarily. However, these changes may also result in the cancellation of insurance cover, if held within super.
Crissy Demanuele, Senior Manager – Product Technical, Life Insurance, BT.
1. In the 2018 Federal Budget, the Government proposed that super funds would not be able to provide insurance under an opt out arrangement for:
a. Members under age 30.
b. Members who have inactive accounts for at least 16 months.
c. Members who have account balances below $4,000.
d. New members under age 25, members who have inactive accounts for 13 months or more, or members who have a balance of less than $6,000.
2. Insurance held within a super fund member’s account must be cancelled if:
a. The member has made a contribution within the last nine months.
b. The member’s account has not received any contributions or rollovers into the fund for at least 16 months and the member has not opted in.
c. The member has not made any contributions or rollovers into the fund for at least 13 months and they have not opted in.
d. The member has not made any contributions or rollovers into the fund for at least 15 months.
3. The PYS changes do not apply to:
a. SMSFs only.
b .Defined benefit funds only.
c. SMSFS, defined benefit members, Australian Defence Force Super members, members in registered superannuation entities with less than five members, and funds where employers are contributing the super guarantee (SG) amount, or above, into the particular super fund.
d. Super funds which are in pension phase.
4. Super fund trustees must send out inactivity notices when a member’s account becomes inactive after:
a. 16 months.
b. Nine, 12 and 15 months.
c. 13 months.
d. 10 months.
5, If a member’s super account is inactive for 16 months or more, and they have not opted in, the following policies will be cancelled:
a. Insurance held inside that super account only.
b. All insurance held inside super by the member, including those in other super funds.
c. Insurance held inside that super account, and any flexible linked cover.
d. Insurance held inside that super account, and any flexible linked cover, and any linked children’s benefit.