Disaster waiting to happen?
We are extremely concerned that some impending changes to superannuation and insurance, as legislated by the Federal Government, will have an unintended detrimental effect on many Australians (and their families).
Effective 1 July 2019, the Federal Government has legislated that superannuation funds must cancel a member’s insurance policies held within their superannuation account if they determine that member’s account has been ‘inactive’.
The definition of ‘inactive’ is that the superannuation account ‘has not received an eligible contribution or rollover into the fund for 16 consecutive months’. To maintain insurance within a superannuation fund which is soon to be deemed ‘inactive’, a member must contact their superannuation fund directly and ‘opt in’ to keep their insurance.
While superannuation funds are required to send multiple warnings to their members who may be impacted, we believe this new legislation may have devastating consequences for some individuals and their families who innocently miss taking the required action, or simply do not understand the potential impact a loss of insurance may have on their situation.
We anticipate that situations will arise where consumers will either:
- Have insurance policies automatically cancelled that they wished to retain; or
- Upon experiencing a circumstance where insurance could successfully be claimed, discover that they previously had a relevant policy in place that could have enabled a successful claim, but the policy has been cancelled without express instruction.
We have provided the following case studies of actual scenarios we have assisted with (although the exact client details have been changed) as examples of how we believe this legislated change may adversely impact Australian consumers:
Case Study 1
- Molly has been a long term client of Beach Wealth Advisers.
- She is now aged 50, is a single mother with two teenage children and works full time.
- Molly approached us some ten years ago (following a separation from her ex-spouse) and we implemented a comprehensive financial plan for her, including a savings and retirement funding strategy, estate planning, and a comprehensive wealth protection strategy designed to protect her and her children in the event medical disaster befalls her.
- We recommended to Molly the use of a new superannuation fund suited to her needs and requirements, and over the past ten years have worked closely with Molly to grow her retirement savings.
- The original recommended strategy also incorporated Life, Total and Permanent Disability, and Income Protection insurance policies, to be held within and funded from her new superannuation fund.
- Unfortunately, Molly was unable to attain the recommended new Income Protection policy due to her occupation being deemed too ‘high risk’ by insurers.
- Fortunately, we were able to ascertain that Molly still had in place an old Income Protection insurance held and funded by the existing superannuation fund she had in place from previous employment.
- Although this old Income Protection policy was inferior to what we had recommended, we subsequently advised she retain this policy due to the old adage “something is better than nothing”.
- We then worked with Molly to ensure there was a sufficient balance within her old superannuation fund to ensure the income protection premiums continued to be adequately funded.
- Over the past ten years Molly has been re-assured by the fact this policy has remained in place.
Under the Federal Government’s new legislation, Molly’s Income Protection insurance will be cancelled on 1 July 2019, unless she either makes a superannuation contribution to this fund prior, or contacts the superannuation fund and completes the relevant ‘opt in’ documentation.
Case Study 2
- Dale was 35 years of age when we met with him.
- Some five years earlier, Dale suffered from a backyard accident while cleaning his gutters at home. Dale suffered from significant life threatening injuries including a broken pelvis, shattered vertebrae and damage to internal organs.
- Although Dale pulled through, five years after the event he remained severely disabled to the extent he would never be able to work again. To exacerbate his health issues, Dale also suffered from severe depression and anxiety as a result of his injuries and associated trauma.
- Dale had managed to successfully apply for a disability care pension from Centrelink prior to meeting with us. However, he and his wife were effectively living well below the poverty line.
- Due to the financial situation Dale and his wife found themselves in, they had repeatedly changed address over the five year period following his accident. They had moved from one rental house to another, one after the other.
- When we met with Dale, we ascertained that he had held a number of jobs over the decade leading up to his accident. We were also able to ascertain that Dale, at that time of employment, had multiple superannuation accounts with different employers making employer superannuation contributions on his behalf.
- Unfortunately, due to his circumstances, Dale had completely lost track of these superannuation accounts.
- Fortunately we were able to gather details of two different superannuation funds Dale had during this period of employment, both of which were still open with small balances, and most importantly, these superannuation accounts still held active Life and Total and Permanent Disability insurance policies.
- More than five years after Dale’s accident, we were able to arrange for Dale to successfully claim significant lump sum Total and Permanent Disability insurance benefit payments from his two superannuation funds which he was previously unaware he held. The receipt of these benefits enabled Dale and his wife to begin a new financial life with greater financial security than they could have dreamed of.
Under the Federal Government’s new legislation effective from 1 July 2019, Dale’s insurance cover would have been cancelled 16 months after his last employer superannuation contribution was received, and Dale would have been none the wiser.
Although we understand the motivation behind the Federal Government’s legislative changes, as is often the case, the law of unintended consequences has not been adequately thought through. The implications of these changes could well result in disastrous outcomes.
If you would like to arrange a meeting to discuss the new legislation, and how it could impact you or your loved ones, we encourage you to touch base with us.
The above information represents general advice only and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any general advice you should consider whether or not it is appropriate in regard to your personal objectives, financial situation and needs.