For many people setting up an SMSF, insurance is an afterthought but the law says that SMSF trustees must formulate, review regularly and give effect to an investment strategy that includes consideration of whether to hold insurance cover for one or more members of the fund. So that is why we usually have to do a needs analysis and work out where to place cover if required.
After we have assessed a new member’s insurance needs we look at what you have in place already and replacement options. But often we need to work with what you have due to changes in health or disparity in premiums when comparing group and individual rates. The basic facts on health are that most of us have some sort of issue by age 45 that triggers further investigation and loadings or exclusions by insurers before they offer cover. The latter issue of premiums is rapidly changing as retail and industry super funds hike insurance premiums and move more towards individual underwriting.
Our preference is to tidy up people’s affairs rather than complicate them and we do prefer to replace insurances where possible and use a combination of policies held inside and outside of your SMSF to maximise the breath and quality of cover while managing the premiums tax effectively. However where new cover cannot be obtained without loadings or exclusions we look at strategies for keeping existing cover in place. THIS IS WHY YOU NEVER ROLLOVER EXISTING POLICIES WITHOUT REVIEWING INSURANCES FIRST.
One of the strategies we use is that when you start your SMSF we leave a portion of your superannuation balance in the large fund to retain the current covers. This is often because it can be cost effective retain life, total and permanent disability (“TPD”) and income protection insurance cover in a large fund.
One of the advantages in keeping a balance within an existing retail/employer or industry superannuation fund is access to sometimes lower cost group insurance that has been arranged on a Group Insurance basis by the superannuation fund. Often, no medical examinations are necessary to have access to reasonably high levels of cover.
Despite any advantages, there can be terms in these insurance arrangements that cause cover to cease. This could be unexpected and usually as a result of clauses found in a 40-50 page product disclosure document that you may never have read. Some of the common cancellation triggers we have found are are outlined below.
No employer contributions
Under Protecting Your Super legislation your account will be considered inactive and transferred to the Australian Taxation Office (ATO) if your account balance is below $6,000 and within the last 16 months:
- we haven’t received a contribution to your account; and
- you haven’t changed your insurance cover, switched your investments, made or amended a binding beneficiary nomination on your account or told us in writing that you don’t want to be transferred.
A number of large super funds also have a clause that states, if employer contributions cease for six/12/13 months, a member automatically loses income protection cover. We understand that this is a policy for certain large funds that offer members automatic income protection insurance. Usually one month before the cover expires the fund notifies the member that cover is about to cease.
Leaving an employer in an employer sponsored plan
When it comes to employer sponsored funds we are aware of funds that require that a particular employer makes contributions to the member account or the insurance stops. TPD and income protection cover cease without notice if the member is no longer working for that employer after 60/71/90 days and their account balance is less than typically $3,000 or $6,000 under the Protecting Your Super legislation. Another fund cancels the Income Protection cover immediately on leaving the employer and no continuation option is offered whereas they do offer to continue the Life and TPD automatically when the member rolls over to a personal plan.
Minimum balance requirements
To retain cover at many industry and retail funds, the funds usually require that the member maintains a minimum balance in your account $6,000 under the Protecting Your Super legislation and have a contribution in the last 16 months. The cut off point or trigger can be as low as $1,000 or as high as $10,000. While most large funds let members retain cover as long as premiums can be automatically deducted from their account, we are aware of a fund that will cease insurance cover for all insurances when the account balance falls below $3,000 and no employer contributions are made after 13 months.
No longer working in the public sector
Some large government funds cease insurance cover if the member no longer works within the public sector. We are aware of some public sector funds where income protection cover ceases on the day the member officially ceases employment with the relevant public sector and no continuation option is provided. There is also another public sector fund that will cease all cover after 60 days from the last employer contribution or when the member stops working in the relevant public sector. Often these public sector funds do not accept further contributions from third party employers or rollovers from other funds.
Terminal illness payouts based on TPD not Life sums insured
We are also aware of a funds whereby on terminal illness, the insurance can pay out at the TPD level, which is often lower than the amount of life cover especially for higher risk occupations. The payment reduces any remaining life cover paid on death. This can mean less funds are available to cover medical or palliative care costs while the insured is alive. Thankfully the standard method of terminal illness cover is to pay out 100% of life cover upon confirmation of a terminal illness with less than 12 months life expectancy.
The kick in the teeth with this restricted payout is that it can also give rise to more tax because the non-dependent beneficiaries will receive the death benefits, as opposed to the member receiving benefits tax free before they die.
Read the Policy and Product disclosure Statement and review it annually
Before relying on existing cover to continue ensure you read the product disclosure statement and policy document particular to your type of policy. do not rely on the latest PDS on the website as this may be for a newer plan and yours maybe an older plan closed to new members so the PDS may not be on the website. email for the exact the PDS you need to rely on so you have a record of the request. Likewise any questions should be directed to the super fund via email for clarification on exactly how insurance cover applies as we know you can get many different answers to the same question over the phone!
Many funds see the employer as their client and may not give adequate warning when insurance cover is about to cease. Therefore it is important to monitor accounts and your contact details periodically especially where you may have elected for email correspondence. Many a cancellation warning has been sent to old email or previous home addresses.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
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