The AFA has alerted its members to the possibility that some of their clients’ life insurance policies inside superannuation funds may start to be cancelled from as early as 1 July this year.
In releasing an ‘important update’ to its members at the end of last week, the Association’s CEO, Philip Kewin, reminded his members about the timelines associated with the introduction of the ‘Protecting Your Superannuation Package’ (PYSP) reforms, which include the following elements:
- A cap on fees for accounts with a balance under $6,000
- A ban on exit fees
- The automatic consolidation of small balance inactive superannuation accounts
- A requirement for trustees to cancel insurance for inactive accounts, where no contributions or rollovers have been received for 16 months
Noting these measures do not apply to SMSFs or small APRA Funds of less than five members, the update reminds advisers that, while the PYSP legislation was announced in May 2018 as part of last year’s federal budget, it was not passed until 18 February 2019 and the regulations were not issued until 4 April 2019.
…any period of inactivity prior to the commencement will be included
Kewin notes, however that the while the reforms come into effect from 1 July 2019, any period of inactivity prior to the commencement will be included:
“Thus, some insurance is likely to be cancelled from 1 July 2019,” warns Kewin.
In detailing how advisers’ clients may be impacted when the PYSP reforms take effect, Kewin said advisers needed to establish:
- Which clients have insurance in a super fund that is classified as inactive
- How long it has been since the account has been inactive
- Whether the clients wish to retain the insurance
If this is the case, Kewin advocates two options:
- Encourage the clients to make a contribution or a roll-over
- Instruct the client to write to the super fund to notify the intention to retain the insurance
“It is also important to know that there is an exemption from the requirement to cancel the insurance after 16 months of inactivity, where the insurance has been prepaid or is on a fixed term arrangement,” said Kewin, who added that no definition of fixed term has been provided, “…although the AFA is aware that some super fund trustees have made the determination that their insurance arrangements are fixed term and that insurance will therefore not be required to be cancelled.”
The update provides additional relevant details around cancellation of cover and ongoing review requirements that will be imposed on super fund trustees, and recommends all advisers should proactively communicate with potentially impacted clients as soon as possible.
Members were also provided with a link to a draft standard message that Kewin suggests they may wish to use to email their impacted clients.