Most people have heard of the strategy to keep existing cover in an employer or industry super fund because rates are cheaper on group policies or health concerns have arisen since cover was first taken out and cover could be difficult to replace.
After a decade of using this strategy the traps are now becoming apparent. We know approximately 15 industry funds and 6 employer funds through retail providers that require a minimum balance or ongoing contributions with a 12-month period or else the insurance cover is terminated or invalidated.
In most cases if it is terminated or cancelled members are informed of the change but some people only find out at claim time because premiums are paid but a clause in the insurance policy invalidates a claim because contributions have stopped or balances have dropped.
Over the last few years I have met SMSF trustees who have come to me after the fact and those conditions had caught them out resulting in claims being denied. Even if discovered when cancelled it is often too late as people cannot get replacement cover elsewhere due to a health condition.
So to avoid falling foul of these conditions:
1. Read the insurance product disclosure statement of the policy to see if there is any reference to minimum balances or requirement for ongoing contributions for the insurance to continue.
2. Call the fund and ask for confirmation of the above in writing.
3. Leave enough to cover the minimum balance and one year’s insurance premiums in the fund.
4. Rollover only the amount above this to your SMSF. Do not use the ATO’s rollover initiation request to transfer whole balance of superannuation benefits to your self-managed super fund (NAT 74662). Contact the specific fund for their partial withdrawal/rollover form.
5. Let your employer SG contributions continue to be paid to the fund holding the insurance. If you are salary sacrificing you can ask for those contributions to be allocated to your SMSF but it may be simpler to let it all go to the existing fund.
6. Annually, or when a balance is sufficiently large, do another partial rollover of the excess funds to the SMSF, and check the rules again to make sure they have not changed.
7. Reference those insurances in your SMSF investment strategy under “consideration of insurance needs of the members” so you don’t forget about them.
So be very careful when your clients get the paperwork for their new SMSF as the mountain of documents for your signature can often mean that you miss the importance of what you are signing. I believe that the ATO form mentioned above is one of the most dangerous documents and you should avoid using it.
Liam Shorte, principal wealth adviser and SMSF specialist, Verante Financial Planning
That’s true Liam, the same insurer can be playing in both markets group and retail, and have completely different definitions for the two offers.
That’s why I said that leaving TPD cover with a Union Fund was asking for trouble.
Following a massive claims blowout, some of these large Union Super funds have jacked up premiums, reduced the sums insured and simply changed the definitions to reduce the number of claims. These changes may have been forced upon them by the losses being experienced by the insurers, but they had choices to reduce their excessively generous AAL’s, increase the premiums further to reflect the fact that they were taking in anyone without any underwriting but choose to change the policy definitions.
So now clients can pay premiums (cant say low premiums any more), just for the fun of it. Good luck getting paid for a claim unless you are truly a vegie.
[quote name=”Jimmy”]Any adviser that leaves clients with TPD cover in a Union Fund is looking for trouble.[/quote]
Jimmy as the cover is being provided by the same people providing the retail insurance cover I would suggest it is the “design of the cover” agreed by the fund and the insurer that we have to watch out for as the race to cheaper premiums means some benefits are cut and claims procedures tightened (like a noose in some cases!).
Any adviser that leaves clients with TPD cover in a Union Fund is looking for trouble.
Good article Liam, but one would question the rationale for keeping the insurance cover within a Union Fund. Premiums have risen so much and TPD definitions have fallen so low, that you can generally get better cover at a comparable or cheaper cost by placing the business with a retail insurer. The client is fully underwritten and there is some certainty around the cover and promise of payment.
The TPD definition at one of Australia’s largest Super funds has been changed to be one of the worst on the market. It doesn’t matter if your client joined the fund 10 years ago or only last week. They will still be judged under the new definition. And may really struggle to succeed in a claim. That’s the real issue with group cover, the member doesn’t own the policy the super fund does! And it can change the terms whenever it likes, unlike a direct contract between the insured and the insurer.
Chad,it’s not something that auto feed insurance research is going to pick up; we have it on our manual checklist as one of (an increasing) number of things we need to ring up and check first. Using third party authorities are essential- even when they override your non expiring authority with a 2 year limit!Agree with Liam, start by checking the PDS every time before you give advice. Once upon a time we used to say leave 3 years worth in the account, but I think funds losing the majority of their balances have gotten wise to that and reworked their clauses to include active account definitions.
[quote name=”Leah Supple”]Very good reminder Liam. I have a client who has just been knocked back. Whilst one industry fund accepted a claim, another knocked it back.[/quote]
I was going to give a Thumbs up for a good comment Leah but realised that it would look bad as the client did not get a good outcome but your example is exactly why we need to be careful. It’s bad if client is rejected for a claim but even worse if we made the error in our advice and they have every right to pursue us and the amounts could be substantial.
Thank you very much for sharing Liam. It’s very important matter to be aware of.
Very good reminder Liam. I have a client who has just been knocked back. Whilst one industry fund accepted a claim, another knocked it back.
[quote name=”Chad”]Hi Liam
Do you have a list of these Super providers?[/quote]
Chad, I am sorry I have been warned not to name specific funds as if I get any wrong even in a little way then I could face the same fate as other advisers who have raised the ire of the big players and ended up facing ASIC scrutiny.
I would recommend you, or a FP referral parter if you are an accountant , approach your technical or research department of your licencee and they should be able to help you.identify the relevant funds.
Sorry fir the cop out but I run a small business and must be conservative.
Liam
Hi Liam
Do you have a list of these Super providers?
This is great, thanks for tips Liam!!!
Well said Liam. This is vital information that all planners need to take on board.
Hi Liam
Many thanks for the article as it was a good practical tips and traps.
I often come across situations where the info you’ve provided will help.i will distribute to others in my company
Doug