At the start of the COVID-19 pandemic, the federal government announced a program allowing Australians in financial distress to withdraw up to $20,000 from their superannuation funds to help them cover their expenses during this difficult year.
So far, Australians have withdrawn $35.2 billion from the super system.
Withdrawing funds from your super fund could affect the death, total and permanent disability, and income protection insurance cover you have inside your super fund. So if you have withdrawn funds from your super fund this year, it’s worth understanding what the consequences for your cover could be.
The first issue, says Daniel Orrell, chief distribution officer, Steadfast Life, is that withdrawing funds from your super account could mean there’s not enough money to pay the premiums, which come from the super balance.
Steadfast Life insurance adviser Bradley Berman says the other risk is taking funds out of super could mean the balance falls below the fund’s minimum requirements. Each fund is different, so check with your fund to find out what this amount is; for many, it’s in the realm of $2,000 to $5,000. If the value of the funds in the account falls below this amount, it’s possible the insurance policies contained within it could automatically be cancelled.
“If you are in a situation where you need to rely on your super savings to get through this period, insurance cover is likely to be an extremely important safety net for you and your family. So understand how your insurance cover is likely to be affected if you have withdrawn funds from your super. If your cover has been cancelled, you may need to explore taking out new policies outside the super environment,” Orrell says.
COVID-19 potentially has other consequences for insurance inside super if you have lost your job during this time and stopped contributing to your super fund. Most super funds require you to opt-in to maintain your cover if you have not contributed to your fund for 16 months. This is to ensure the balance isn’t eroded by premiums coming out of the fund. Not contributing to your super fund could also indicate you are contributing to another fund in which you hold insurances. So requiring fund members to opt in if they have not made regular, recent contributions also avoids people doubling up on their insurance policies, which can also eat away at their retirement savings balance in the event they have more than one fund.
“If your insurance policies have lapsed, you can approach the fund to try to get them reinstated, but that can be a difficult process,” says Berman. Some funds may also require the member to undergo a series of medical tests to reinstate their policies.
If your policies have lapsed, one option may be to check the ATO’s site to see if you have any other super funds you have forgotten about, in which your insurance policies may still be current, and start contributing to these funds to keep the policies active.
“If you have lost your cover, your first port of call should be your financial planner to find out the best approach to take,” says Orrell.
“Not contributing to your super fund could also indicate you are contributing to another fund in which you hold insurances”
It’s also important to understand the pros and cons of holding insurance inside versus outside the super environment. “When you put insurance inside super, every time you pay a premium from the account it reduces your superannuation balance. Let’s say you’re a low income earner who only contributes $2,000 a year. If the premium you are paying inside your super is more than that, you could be eating away at your nest egg,” Berman notes.
If you pass away and your life insurance policy makes a payout, and you nominate one of your adult children as a beneficiary, he or she could also end up paying tax on this money if it’s inside the super environment. Additionally, if you hold income protection insurance inside super, typically it will only provide the most basic cover. You also won’t be able to claim the premiums as a tax deduction in the same way you may be able to if the policy is held outside the super environment.
The information in this article is of a general nature and does not take into account your own financial objectives, circumstances or needs. You should consider your own personal situation and requirements before making a decision. If you have concerns or questions, please contact Steadfast Life.
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