The government recently changed the law so that insurance can no longer be held in superannuation accounts that are considered inactive.
From 1 July 2019, ‘Protecting Your Superannuation” laws come into effect. An inactive superannuation account will no longer be able to hold insurance unless the account holder “opts in” to the insurance cover.
An inactive account is one that has not had any activity for a period of 16 months or greater. The activity is generally a rollover or contribution.
The rationale behind the change is to stop superannuation funds charging for insurance a client does not need, or is not aware of.
In order to continue your insurance cover you need to opt-in to the insurance. Your insurer should notify you of the change, but if you have changed contact details the correspondence may not reach you.
Once you have opted in there is no need to do so again and the insurance cover will be maintained.
Whilst the policy will help ensure superannuation is not eaten away by insurance unnecessarily, the legislation may affect some harshly.
Those who need to ensure their coverage is maintained include:
· Those on maternity/paternity leave. If you have recently had a child and are taking time off to look after them – it is important your insurance remains in place for the family.
· Those who have bad health. If your health has deteriorated then you may not be approved for insurance cover if you apply now. It is critical to make sure the cover then you have is maintained, especially if you have a family to consider.
· Anyone who is overseas and not contributing to their fund is also at risk of losing cover.
Paying for your insurance through superannuation is not ideal for everyone.
The main advantages are:
· Cost – because the funds buy in bulk you may be offered rates cheaper than applying directly yourself.
· Cashflow – as the insurance is paid by your superannuation fund, it does not affect your personal budget. For young families this can be especially important, and it can help you maintain your cover if you loose your job.
· Eligibility – some of the funds may offer low levels of cover by asking only a few questions about your health. This might help some people get cover that would otherwise be unavailable.
· Taxation – some insurance cover is tax deductible to your superannuation fund.
The main disadvantages to be aware of:
· Auto Cover – whilst having automatic cover limits is great for making it easy to apply, it may not be enough cover for some individuals insurance needs.
· Retirement Savings – premiums paid by your superannuation fund ultimately reduce your retirement lump sum savings.
· Taxation – some insurance claims paid through superannuation are subject to taxation. Held outside superannuation the payment is tax free.
· Portability – if you leave a fund (or sometimes an employer) the insurance cannot be transferred. This can be a big issue if your health deteriorates, leaving you locked into a poor performing fund to maintain your insurance cover.
· Claiming – when receiving an insurance payment through superannuation you must claim through the fund and then the trustees must approve the claim.
For more professional retirement planning advice, call 02 9634 6698 or book a free consultation online with our expert financial advisors at our office in Sydney's Norwest.
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