Insurance dilemma in superannuation auto-consolidation
Insurance policies within low balance superannuation accounts will prove a challenge for the effective implementation of the Government's auto-consolidation proposals within its Stronger Super policy.
While research released by the Financial Services Council (FSC) yesterday strongly supported the need for auto-consolidation, it also pointed to the number of small accounts carrying life insurance benefits.
It said superannuation accounts were often linked to products such as life insurance which "could present a barrier to consolidation as individuals may rely on these accounts for protection".
"Of the 6.9 million inactive accounts eligible for consolidation, it was found that 1.3 million accounts are linked to life insurance policies," the research analysis said.
"Even though members who own these low balance accounts may be unaware of their linkages to life insurance, these accounts present a challenge for auto-consolidation, as some of these members may wish to maintain their life coverage despite not making contributions to the fund," it said.
"Additionally, given that Australia's underinsurance gap stands at $972 billion, it is important that the desire to reduce duplicate superannuation accounts does not result in members losing existing insurance cover that may not be accessible to them in the future, thereby exacerbating the number of underinsured Australians," the analysis said.
The research was conducted by FSC and financial services technology provider DST Solutions, with FSC chief executive John Brogden saying it confirmed that auto-consolidation would lead to a considerable reduction in the number of accounts and would significantly improve the efficiency of Australia's superannuation system, leading to lower fees for consumers.
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