A draft code of practice, which will be released by the Insurance in Superannuation Working Group (ISWG) today, outlines several moves to prevent super balances being unnecessarily eroded by insurance fees.
Around two-thirds of Australians have life insurance through their super fund, where cover is provided on an automatic opt-out basis, which sees more than A$8 billion (US$6.4 billion) in premiums going to insurers ever year.
The draft code will propose a cut-off period for life insurance cover where a fund member has not made a contribution for a 13-month period. The draft rule requires funds to attempt to consult with customers three times before cover is withdrawn, reported The Australian. But the 13-month period has already been criticised as too long because the vast majority of funds are aware that contributions have stopped after four months.
Rice Warner has estimated a quarter of all fund members are being charged fees for life insurance policies sitting in idle funds which haven’t received contributions in over a year. Many Australians have multiple funds, which are provided on a default basis when an employee fails to nominate their own fund.
The draft code of practice also proposes limits on the level of premiums that can be charged to different cohorts within a fund. The guide suggests premiums should not exceed 1% of estimated earnings for a specific subset of fund members, and a limit of 0.5% for those aged below 25.
The draft code of practice is open to consultation for a month. The working group is aiming to have a final code prepared by December, which the industry is aiming to implement by July next year.
The ISWG comprises members of the Financial Services Council, Industry Super Australia, The Association of Superannuation Funds of Australia and the Australian Institute of Superannuation Trustees, along with consumer advocates and lawyer groups.