SMSF members may lose insurance due to changes in super blog image

SMSF members may lose insurance due to changes in super

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According to a report by Cuffelinks, the proposed changes in super named the “Protecting Your Superannuation” package, which will take effect starting 1 July 2019, may have considerable ramifications for SMSF members with large super balances that maintain smaller public offer accounts for the sole purpose of accessing fairly-priced life insurance.

The legislation was made to protect small super balances. However, it may also place insurance policies in danger unless SMSF members take action.

The key changes

The important changes starting 1 July are developed to limit the erosion of small balances in the following ways:

  • Fees will be restricted to no greater than 3 per cent per annum for super accounts with a balance of less than $6,000.
  • Exit fees concerning all super accounts will be prohibited so that the obstacles to consolidation can be eliminated.
  • For inactive accounts, insurance can be kept on an opt-in basis. Inactive accounts are those that have not gotten a contribution in 16 months. Funds will be obligated to get in touch with inactive members prior to 1 May 2019 to verify if they want to keep their existing cover.
  • Super members will additionally be requested to transfer all inactive accounts with balances less than $6,000 to the Australian Taxation Office (ATO). They, in turn, will aim to transfer the balances to the owner’s active super account.

It should be noted that the proposition to make insurance an ‘opt-in’ for individuals who are starting a super account under the age of 25, or with a super balance of lower than $6,000, was cancelled from this regulation and will be submitted in a separate bill that has not yet passed.

According to the report, these changes in super are likely to affect SMSF members who have been maintaining a small inactive super fund for insurance purposes. It may result in the cancellation of insurance policies. On the other hand, if the balance is below $6,000, not only will their policy get cancelled, their super balance will also get transferred to the ATO.

Many may not like any of these outcomes, especially if you are purposefully arranging insurance cover in an account that’s separate from your existing active super balance.

Should a member’s existing cover get cancelled, they may not have the ability to receive new cover that has the same terms as they’ve previously had. They may have to reveal medical conditions that have occurred since they initially applied. Doing so may lead to higher premiums or exclusions, or worse, they may no longer be eligible for cover at all.

Insurance is vital for individuals who have debt, dependents, or for people who depend on their income for their financial stability. If the insurance is kept in a superannuation fund that an SMSF member is not contributing to, they will have to strongly think about whether or not to make that fund active again, or at the very least make sure that the trustee of the fund understands they want it by opting in.

If you need proper advice on your super fund and insurance, contact a Chan & Naylor Wealth Management specialist here today.


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