Insurance policies in superannuation should be discontinued after accounts have not received contributions for 13 months, according to the Insurance in Superannuation Working Group.
ISWG, which includes umbrella organisations covering both industry and for-profit superannuation funds, has called for the move as part of a plan to ensure that small superannuation balances are not eroded by unnecessary insurance premiums.
“The proposal is that where there have been no contributions made to a super account after 13 months, cover will automatically cease,” Eva Scheerlinck, CEO of the Australian Institute of Superannuation Trustees, an ISWG member, told The New Daily.
The move would not be made until the fund trustee has tried to communicate with the member three times.
“The danger is that having unnecessary insurance premiums or high fees can erode retirement balances by up to 40 per cent,” Ms Scheerlinck said.
Currently there are about 26.7 million superannuation accounts but only about 14.8 million fund members. So 40 per cent of people have more than one account with some having six or more.
“Most people stop contributions after they have changed funds or changed jobs and in those situations unnecessary fees erode balances. That is especially the case with income protection insurance where multiple claims can’t be made,” she said.
ISWG has also called for restrictions on the level of premiums as another protection from the unnecessary erosion of balances by insurance costs.
For mature workers the limit proposed is 1 per cent of ordinary time earnings while for workers under 25 the limit should be 0.5 per cent, ISWG said in its recommendations. The working group said that such a move would not be cost-free.
“In order to achieve the premium limits noted above, there may need to be a reduction of cover for some segments of members in order to reduce their premiums,” the report said.
However ISWG proposes that those in dangerous occupations should be excluded from these restrictions to ensure they are getting coverage suitable to the risks they are taking.
“Where these members are unlikely to be able to purchase appropriate and affordable cover outside superannuation, a trustee may provide automatic cover to this segment with premiums that exceed the 1 per cent earnings cap,” the report said.
ISWG is also concerned that those with terminal illnesses will not have their insurance cover inadvertently removed. So the group recommends that where super is paid out early in such circumstances, fund trustees should be required to retain sufficient money in the account to meet their premiums so that ill people don’t lose their insurance cover.
Ill people also face another risk; that of losing their insurance through insurance policies having tighter definitions of illness than the funds themselves.
“There is currently a risk of this occurring as insurance policies can have a stricter definition of ‘terminal illness’ than the legislated superannuation definition. The ISWG intends to consider the alignment of definitions in its further work on the Code and in consultation with the insurance industry,” the report said.
The ISWG code on insurance in super will be reviewed by government, regulators and the Productivity Commission which is currently reviewing the superannuation system.
*The New Daily is owned by industry super funds