Don’t be left uninsured
It is every person’s nightmare to learn that they have been diagnosed with a terminal illness and their life insurance policy has lapsed, particularly if they are older and have family obligations, resulting in no cover for their loved ones and no cover to pay for funeral expenses.
Many Australians obtain life or disability insurance through their superannuation funds. The tax savings obtained by paying life insurance premiums using pre-tax income is a huge incentive and, for many employees, it is the default option for buying life and disability insurance.
This alert provides an important warning to all persons who have life or permanent disability insurance through their superannuation fund. It discusses the risk of losing their life or disability insurance altogether through inadvertence or lack of attention.
Even if insurance is lost and new insurance can be covered, if any conditions are discovered by the new insurance company, it could lead to a dramatic increase in insurance premiums or exclusions for pre-existing conditions.
Some superannuation trust funds also require a minimum balance to be maintained to fund the payment of insurance premiums. Once the member’s balance falls below the threshold, their insurance cover may be cancelled.
Read below on how to avoid these pitfalls.
Loss of insurance due to change of employer
Recently, a client lost his life insurance policy when he changed employers and cashed out the proceeds of his former employer’s superannuation fund.
Before he was able to apply for and obtain life insurance through his new employer’s superannuation fund, he was diagnosed with a terminal illness and he came to us for advice after he was informed that he was uninsured.
Fortunately, we were able to get the client’s old insurance policy effectively reinstated.
This difficult problem arose because when he changed employers, he also had to change his superannuation fund. He was offered several options by the superannuation scheme he was exiting (the ‘Old Fund’), and eventually cashed out and put the proceeds into his new employer’s superannuation fund.
Concurrent with the termination, the client’s life insurance ceased to exist as it had always been paid for and provided pursuant to the Old Fund.
As the client was diagnosed very soon after with a rare and terminal disease, he was unable to obtain a replacement life insurance policy through the new superannuation fund’s insurance company which required medical evidence and confirmation that he was an acceptable risk.
The continuation option
One of the key issues raised with the trustee of the Old Fund was the fact that the client had not been offered the option to continue paying for his life insurance policy so that the premiums were no longer being paid by his employer but directly by him.
This is referred to in the superannuation industry as the ‘continuation option‘.
Following research and an investigation into the circumstances of the case, we were able to persuade the trustee of the Old Fund to effectively reinstate the client’s policy and once again make him insured.
The trustee of the Old Fund also generously waived all premiums for the period in which the policy was not in effect.
Loss of insurance due to inadequate funds
In another recent case, a client’s widow came to us pressing a claim for death cover. She was informed by the trustee that, after her deceased husband passed away, his life insurance had been cancelled because the balance in his account fell below the minimum required by the fund’s rules.
That claim is now before the Financial Services Ombudsman.
Watch this space for future developments in this emerging area of dispute. Given all the money and insurance policies tied into superannuation funds, it pays to know your rights and to closely monitor your insurance cover if it is obtained through a superannuation fund.
Advice — Beware the pitfall
The experiences of our clients illustrates an area of concern that some people may overlook when changing superannuation funds — the effect on their life and disability insurance policy.
Given the significance of insurance, particularly as you get older, you must be certain not to lose your cover should you change superannuation funds or cash out all of the proceeds.
If you intend to cancel the life insurance provided through your old fund, then you should only do so once a replacement policy has been issued, whether through your new fund or outside of superannuation if that better suits your needs.
Not only can you lose your insurance, but the cost of the insurance can become unaffordable or increase in cost if your medical conditions have changed from the time you procured your insurance through your old superannuation fund.
Moreover, it may be that the new insurance company requires (as a condition to covering you) that certain diseases or ailments are excluded. This could also lead to disastrous results.
The same concern may arise if you transfer money out of an employer based superannuation fund into a self-managed superannuation fund (SMSF). One option is to leave enough in the old fund to cover ongoing premiums for insurance, provided the fund’s rules permit you to do so. Proper care must be taken and advice may be needed.
For more information, please contact David Weinberger, Principal Lawyer, on (03) 8600 8863 or firstname.lastname@example.org.
Note: This update is a guide only and is not intended to constitute legal advice.