Consolidating super, but what about the insurance?
The growth of lost super in Australia has become a substantial problem with some $18 billion allegedly sitting in about 6.3 million unclaimed super accounts.
Approximately $14.2 billion of the lost super is held by super funds, with a further $3.75 billion in unclaimed super held by the Australian Taxation Office (ATO).
Much of this has to do with the frequency by which Australians now change jobs and have their superannuation guarantee redirected to the new employer’s default fund.
The increased awareness around lost super, has sparked greater interest by individuals to find their old super plans and tidy them up by consolidating them into a single fund.
This is usually into their active one with their current employer.
Superannuation consolidation, when done right, has the potential to improve the investment performance and management of a person’s super, relative to their needs.
This is because the individual can direct how the entire consolidated super is invested and they can consider their personal circumstances, tolerance to investment risk and their retirement objectives.
Additionally, consolidation can also help to reduce the costs of management and simplify estate planning.
However, the problem with this new trend lies in many of the super consolidating forms, and some online systems, which omit sufficient reference to the potential loss of personal insurances via the consolidation process.
Too easy to lose your family's protection
The big issue with having few controls when an individual consolidates his super through his existing super funds transfer form, is that they could unknowingly throw away their insurances, essentially losing their family’s risk protection.
Depending on the health and age of the individual who consolidates, these insurances may never be able to be reinstated or new plans established, due to medical reasons or prohibitive premium costs.
The one-form, easy-click option now offered by many suppliers, arguably fails to protect Australians from the potential loss.
If an adviser was to do this directly by providing advice to an individual to consolidate their super, and they omitted the client’s insurance needs, there would be the potential that any future liability could fall on them.
Yet currently there are services facilitating this same process, on a self-service basis, which are passing the onus and responsibility of this very technical area onto a potentially ill-informed or ill-equipped individual.
Whilst convenient, these individuals are not being given the opportunity to make an informed decision.
The mindset is around consolidating their super, not about the impact of foregoing their insurances.
A standard of protection
The expectations from the public is that there should be fail-safes, a standard of protection, in place with these types of self-directed services which are at least the equivalent to that which an adviser is expected to provide an individual when consolidating super.
This needs to go beyond a simple risks statement in fine print on the form or submission page.
As with many financial products, these types of transactions should offer at the very least, a 14-day cooling off period and perhaps a compulsion for the recipient fund to state in writing the actual loss of insurance that will be incurred from consolidating.
If the transaction is initiated online, then the follow-up could be delivered digitally.
The recipient super fund may even choose to offer a comparable replacement, subject to medical underwriting, with the provision being that no cancellation of insurance of super funds would take place until the insurance terms are issued and accepted.
Offline transactions via paper-based forms need to protect the individual by compelling the recipient fund to gather the information about insurances and issue a confirmation of insurance losses before the consolidation takes place.
Again, this would allow the recipient fund to offer a comparable level of cover as part of the transaction, subject to medical underwriting. Win win.
This simple statement by the recipient super fund would provide a safety net to an individual who wishes to manage their own financial affairs but lack some of the technical information that would usually be provided by an adviser.
An adviser, by comparison, is obligated by law to highlight the loss, or potential loss, of insurance for an individual, in the written advice they provide.
It's important with insurance levels so low
With massive under-insurance of working Australians it’s unfathomable that this could be allowed to occur.
It essentially allows the unwinding of years of successful superannuation regulation.
Rules which enforced minimum levels of insurance in employee’s default funds to be established and encouraged individuals to consider using superannuation as a tax effective means of increasing the protection of their family’s future in the event of their death or disability.
For many Australians this is the only cover they have.
Until something changes however, it appears Australians are going to be reliant on their own ability to assess the risk of these types of transactions themselves or make the decision to seek advice from a specialist.
Those who decide to go at it alone should consider some key questions about insurances when consolidating super which may include:
How much insurance cover do I need to protect my family, on my death or disability?
Do my existing super funds hold insurances and will they be lost if I consolidate to a new super fund?
Have I had any health-related issues that could prevent me from obtaining insurances in the new super fund or elsewhere? and
What could be the financial impact on my family if I died or became permanently disabled, after I consolidated my super, and potentially lost my insurances from the previous funds?
The answers to questions like these will help to shape their super consolidation and personal risk strategy, and potentially impact the success of their future financial plans.
Nathan Walker is a financial planner at RSM Australia.
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