Shape up for changes to life cover
Auto-consolidation of super could leave you worse off, writes John Kavanagh.
Auto-consolidation of super could leave you worse off, writes John Kavanagh. The government's plan to introduce automatic consolidation of superannuation accounts could result in millions of fund members losing valuable life insurance benefits.Among the millions of inactive funds that will be swept away over the next couple of years to make the super system more efficient, an estimated 2 million have life policies that remain in force and represent value to fund members. Once the fund is closed and the retirement savings account balance transferred to the member's active fund, those life insurance benefits will be lost.Fund members have until 2014 to find out whether they have lost or inactive funds and whether those funds have life insurance policies worth maintaining.Last month, the Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, issued the government's plans for implementing industry reform recommended in last year's report of the Cooper Review.A big element in the package is a move to clean up all the lost, inactive and duplicated super accounts.There are more than 30 million super accounts in the system - three accounts for every member of the workforce, which means people pay more in fees than they need to and add cost to the system overall.The consolidation process will be achieved in a number of steps.From January next year super funds will be able to use members' tax file numbers to search the Australian Taxation Office register for any lost or unclaimed super and advise the member that they may wish to consolidate their accounts.From July next year, where a member has multiple accounts within the same fund, the fund will be required to consolidate these accounts, where possible.Auto-consolidation will start in January 2014. The Tax Office will identify lost and inactive accounts with balances of less than $1000 and advise the "active fund" - the fund the person is using. The Tax Office will do this each year.The active fund will then be responsible for arranging consolidation unless the member opts out. The fund will have a prescribed time to write to the member advising them that if they do not opt out the fund will go ahead with the consolidation process.As part of this process the member will be advised that there may be insurance cover in the other funds and they should consider this before making a decision.The government plans to increase the threshold for auto-consolidation to funds with balances up to $10,000. This is planned for late 2014 but is subject to a review of the scheme by the Treasury, the Australian Prudential Regulation Authority and the ATO.A partner at Maurice Blackburn Lawyers, John Berrill, says that in some funds the life cover continues for as long as contributions are paid, lapsing when contributions stop.In other funds, the cover continues after contributions stop (in such cases, the insurance premiums are deducted from the account balance).Berrill, who is a member of the government's Stronger Super implementation group, estimates that of the accounts that will be caught up in auto-consolidation, at least 2 million include some form of insurance cover.Berrill says: "The proliferation of multiple super accounts is a problem in Australia and the consolidation of unnecessary multiple accounts is good policy."However, in doing so, we must be careful not to undermine one of the success stories in super, namely giving millions of Australian workers access to relatively cheap life insurance cover."The head of life insurance at Rice Warner Actuaries, Richard Weatherhead, says there are a number of things that fund members can do to look after their interests. With auto-consolidation not due to start until 2014, members have time to investigate whether they have lost or inactive accounts.The Australian Securities and Investments Commission's MoneySmart website has a guide to finding lost and unclaimed super, consolidating accounts, checking employer contributions and doing all the necessary paperwork.(See moneysmart.gov.au/superannuation-and-retirement/keeping-track-and-lost-super.)Once lost or inactive accounts are located, members should inquire about whether those accounts include life policies that are still in force. That can be done with a phone call to the fund.Weatherhead says in many cases a fund member can replace the cover in an old fund by purchasing additional units of cover in their active fund.For some people this will be a straightforward process. But some people will find that the cover they have in an inactive fund is not available to them in another fund such a situation would occur if they have suffered a medical condition that makes them ineligible for new cover of that type.A person in that situation might want to hold on to an inactive fund and would choose to opt out of auto-consolidation.Funds have automatic acceptance limits, which set the maximum amount of life cover members can have without having to go through a fully underwritten application process (with medical examination and so on).People need to check whether the limit in their active fund is sufficient to allow them to replace the cover in an inactive fund. They also need to check that the policy conditions and the cost of cover are similar.If they are not able to get the same policy terms or have to pay a lot more for it, it may be worth holding on to the inactive fund.Weatherhead says some of these potential problems may be sorted out before auto-consolidation gets under way.He says the insurance industry bodies are looking at developing a set of standards and common approaches that will apply to insurance throughout the consolidation process.The chief executive of group life at insurer TAL, Andrew Boldeman, says most funds offer a basic level of death and total and permanent disablement cover as standard and many funds will allow members to transfer their cover when they move their account.Boldeman says the class of life insurance that is not as readily available is income protection, or it may only be available in very basic form. If people have income protection cover in a fund that is going to be consolidated they need to look carefully at what is offered in their active fund.Do you have enough cover?While rummaging through your superannuation fund documents checking the status of your life insurance arrangements, it is worth making sure you have enough cover.Life insurance sold through super funds is relatively cheap and, in most cases, it is easy to apply for "extra units" of cover.Rice Warner Actuaries gives the following estimates for adequate cover:The overall insurance needs for young parents aged 35 are: $530,000 to provide a subsistence level of cover $750,000 to provide an income replacement level of cover and $4500 a month of income protection.The overall insurance needs for older parents aged 45 are: $410,000 to provide a subsistence level of cover $670,000 to provide an income replacement level of cover $660,000 of total and permanent disablement cover and $5000 a month of income protection.Rice Warner estimates that current levels of insurance for working-age Australians provide about half the amount of cover required to ensure that families and dependants can maintain their standard of living after the death of a parent or partner.Only 22 per cent of people have income protection.