Following the Government’s release of the Stronger Super information pack, Jeffrey Scott outlines some of the major changes about to happen with respect to insurance within superannuation.
On 21 September 2011, Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, issued the Stronger Super Information Pack 1. The Government addressed a number of issues regarding life insurance inside super.
It has been proposed that MySuper products will be required to offer life and total and permanent disability (TPD) insurance to all members on an opt-out basis, and members of MySuper products will be able to increase or decrease their insurance cover (if offered by the trustee) without having to leave the MySuper product.
There may be particular factors from a workplace perspective which influence the appropriate level and structure of insurance for employees.
Therefore, within a MySuper product, it will be possible for the insurance cover to be tailored for a particular employer for the benefit of its specific workforce. Given the standardisation of most other aspects of MySuper products, insurance will become a key differentiator.
Automatic consolidation
Automatic consolidation of superannuation accounts may pose the risk that in certain cases, where a member is funding insurance premiums from an inactive account, they may stand to lose insurance cover.
Unless a super fund member chooses to opt-out, then this mechanism will combine their inactive account with the member’s active account.
The Government has announced that lost and inactive accounts (two years without contributions or rollover) with balances less than $1,000 will be automatically consolidated into the active account unless the member opts out.
Term, TPD and income protection within superannuation
The Government has decided that trustees must allow members to opt-out of life and TPD insurance within 90 days of the member joining a fund, or on each anniversary of the member joining the fund.
If trustees are unable to obtain opt-out cover at a reasonable cost, trustees of MySuper products will be required to offer compulsory life and TPD insurance. Trustees of choice products can either offer compulsory insurance or no insurance.
The Government has decided that it will be left to the trustee’s discretion whether to offer income protection insurance on an opt-in or opt-out basis, or at all.
Insurance policy definitions
Currently, there are some insurance policies which offer benefits that may not meet an immediate condition of release when an insurance payment is made to the superannuation fund.
The Government wishes to ensure that the definitions used in all insurance policies purchased through super align with superannuation conditions of release so that insurance is consistent with the purpose of superannuation and that insurance monies are available to members at the time of their disability.
The Government wants this change to be made as soon as possible, and to facilitate a phase-out of existing policies which are not consistent with the Superannuation Industry Supervision (SIS) Act definitions of life, TPD and income protection insurance.
This means that any definition sitting within the superannuation environment that does not meet strict SIS definitions will not be permitted. This will likely have the biggest impact on definitions of TPD within superannuation; specifically, own occupation TPD will likely be banned.
Other TPD benefits that are likely to be affected are ancillary benefits such as: loss of limbs and sight, activities of daily living, and act of daily work. This new provision may also impact income protection benefits.
Agreed value income protection policies may be affected, leaving only indemnity policies within superannuation. Also, it is likely that there will be a ban of ancillary benefits on income protection policies paid in the event of: specified injury, critical illness, and rehabilitation benefits.
Where own occupation TPD proceeds have been used by a client to boost their retirement funding within super, this will no longer be possible.
The only alternative to this will be where an individual has the ability to receive an own occupation TPD benefit outside of super and then makes a non-concessional contribution to super, up to the legislative cap ($150,000 per annum or $450,000 over three years).
Trauma insurance will be banned in its entirety from being held within super; this is consistent with the recommendations of the Cooper Review and the Government’s Stronger Super response in December 2010.
To improve transparency and comparability of insurance provided through superannuation, the Government will consult on an approach to ensure policy terms are disclosed in a standardised way.
Insurance strategy
As part of the Stronger Super reforms, the Government has also indicated trustees will be required to develop and maintain an insurance strategy to demonstrate that insurance is being managed in the best interests of beneficiaries.
The Government has placed a significant emphasis on insurance within superannuation. It appears that their primary objective is to ensure most individuals have life insurance and TPD cover at a reasonable cost.
Jeffrey Scott is the executive manager, business growth services at CommInsure.
