New superannuation laws take effect on 1 July, and they have huge implications for any of you who have life insurance inside your super fund.
From that date, super funds will be prohibited from providing insurance cover to a member whose account is inactive, unless that member elects to keep their cover. For the purposes of these rules, an account is considered inactive, "if it has received no contributions or rollovers for 16 consecutive months".
If your account is inactive, and you have not notified the fund that you wish to keep your cover, the fund is required to automatically cancel all insurance cover in your account.
If you want to keep your cover in an inactive account, it's important to advise your fund before 30 June. Keep in mind that this year 30 June falls on a Sunday, so you would need to act by 28 June.
The new rules coincide with the start of a new financial year, so grab the opportunity to get both your super and your insurance in order. This is the perfect time to amalgamate your super if you currently have multiple accounts. You can use the ATO online services through myGov to do it. But first, carefully check the implications for any insurance that is held by the fund you are closing.
It may seem like a no-brainer to roll all your super accounts into one account to save fees, but life insurance can be a major issue. I recently heard about a family in which the husband was diagnosed with an incurable disease. Thinking she was acting in the best interests of the family, his wife rolled all his super into one super account. She did not realise until it was too late that by doing so she had lost $400,000 of life insurance that was held in one of the accounts she closed.
The lesson is clear: don't roll your super funds together blindly.
The purpose of insurance is to help the family cope if one or more of its members become injured, or too ill to earn a living. This is often interpreted as insuring the breadwinner's salary. But life insurance may be needed for a non-earning partner too. Suppose a couple had young children, and mum was at home looking after the kids while dad worked full time. If she died or became seriously ill, the family may need to pay for household help in order to cope.
Because insurance costs, if you are over insured you are wasting money, and if you are under insured you are taking a serious risk. This is one reason many people hold insurances within super, where you don't feel the cost of them, but as you are looking at the balance of risks and costs, you should also seek advice as to whether insurances are better held inside or outside super.
For example, income protection is usually best held in your own name, because the premiums are tax-deductible. It also enables you to check you have the right specifications to suit your situation, as the one-size-fits-all insurance within super may not be that suitable.
Both income protection and TPD (trauma and permanent disability) insurance do not have an "own occupation" clause if held inside super. This means that if you make a successful claim the insurer can make you take any job you are still able to do. For example, if you are no longer able to work as an airline pilot, you may be told you have to work as a parking attendant. If you choose your own cover outside superannuation, while it will usually cost you more, you can select an "own occupation" policy clause, so you will be paid if you are unable to return to your specified occupation.
These are just some ideas of avenues to explore. I suggest you take this opportunity to sit down with your financial advisor, or insurance agent, and go through your insurance needs in detail. Then you can decide whether your insurance needs any changes.
- Noel Whittaker is an Australian expert on personal finance and the author of Making Money Made Simple. Send your money questions to firstname.lastname@example.org.