Is your life insurance quietly being cancelled while you focus on your SMSF Administration?

If you hold insurance in an old retail or industry super fund, a law most trustees have never heard of could be erasing your cover — right now, without you knowing.

At autoSMSF, we work with trustees on SMSF administration every day. One of the most consistent blind spots we see — especially among self-employed trustees and those who set up their SMSF after years in a large fund — is a quiet, preventable disaster involving insurance they believe is still active.

It almost never is.

What the law says

Under the Treasury Laws Amendment (Protecting Your Super Package) Act 2019, superannuation funds are required to cancel insurance on accounts that have received no contributions for 16 consecutive months — even if the account still holds a balance. This applies to retail and industry funds. It does not apply to SMSFs.

The intent of the Protecting Your Super (PYS) laws was sound. Billions of dollars sat in forgotten accounts, quietly eroded by fees and premiums that served no one. Cancelling insurance on genuinely inactive accounts made sense for those members.

But for SMSF trustees who deliberately keep a second fund account to preserve their insurance cover, the law creates a trap that is both serious and entirely avoidable — if you know it exists.

Why so many SMSF trustees are exposed

When your focus shifts to running an SMSF — managing investments, meeting compliance deadlines, organising your annual audit — the old retail or industry fund can easily fade into the background. No contributions are flowing in because your employer contributions now go to the SMSF. The old account just sits there, holding your insurance.

And that is precisely the problem.

Many trustees have very good reasons to keep insurance in the old fund rather than arranging cover inside the SMSF or through a separate policy. Pre-existing health conditions can make individual underwriting difficult or impossible. Group cover negotiated across thousands of fund members is often significantly cheaper than an equivalent retail policy. For these trustees, maintaining the old account is a deliberate, financially considered decision — not an oversight.

“A balance in the account is not enough. Under the PYS rules, ‘active’ means contributions must flow in.”

The PYS laws do not care about your reasons. They only care about whether a contribution has been received in the past 16 months. If it hasn’t, the fund is required to cancel your insurance — and the fund will have met its obligations if it sent you the required warning notices, regardless of whether you read them.

A scenario worth taking seriously

Consider a self-employed professional in their mid-forties — a tradesperson, a consultant, a small business owner — who set up an SMSF several years ago. Their income fluctuates. In a quieter stretch of 12 to 18 months, no contributions flow into the old fund. Their insurer sends warning emails. One goes to junk. One gets read but deferred. The third arrives and they deposit some money — but miss the separate opt-in step the fund also requires. Their insurance is cancelled.

They don’t find out until it matters most. And by then, it’s too late to reinstate it on the same terms — if at all.

This is not a hypothetical edge case. It is a pattern we see referenced regularly across the financial planning community, and the consequences for families can be severe.

What you need to do today

The good news is this is entirely preventable. Here is what we recommend to every SMSF trustee who holds insurance in a separate retail or industry fund:

Do not wait for the next warning email

Super funds comply with the law by sending notices. They are not required to chase you down, call you, or ensure you have taken action. Once the cancellation window closes, it closes. There is no appeals process. Reinstatement — particularly if your health has changed since you first took out the cover — may be on entirely different terms, or may not be possible at all.

The cost of group cover held in a retail or industry fund is often a few hundred dollars a year. The cost of losing hundreds of thousands of dollars in cover to a technicality — when your family needs it most — is immeasurable.

If you are an SMSF trustee with insurance in an old fund, check it this week. Not next month. This week.

If you have questions about how this affects your SMSF setup, or want to review your overall super and insurance strategy, the team at autoSMSF is here to help.