Colonial First State executive manager Craig Day explained that currently if an employee doesn’t make a choice to choose a particular superannuation fund, they go into the employer's default fund.

“A number of years ago the rules were changed to basically require opt out insurance cover. So what happened with that is you saw lots of people moving around and ending up with lots of accounts with lots of duplicated insurance policies sitting in them,” said Mr Day.

This latest announcement which is aimed at addressing this issue, he said, will mean that where a fund is inactive for more than 13 months the insurance will be turned off, which could impact SMSFs.

“Where you've got someone that's set up an SMSF that's perhaps in their 40s and they've already got life and disability insurance inside a large fund, it's not uncommon for them to leave $20,000 sitting inside that large fund and then roll over the balance to commence an SMSF and then redirect their employer contributions into their SMSF,” he explained.

“[Since], you’ve got no employer contributions going to that fund under these new rules there's a risk that it could be deemed to become inactive and therefore that insurance policy could be cancelled unless you take action to make sure that it doesn't get cancelled.”

Under these proposed rules, members could redirect employer contributions back into that account to prevent this but that may not be appropriate for their arrangements.

“The other thing that people will have the option to do is to opt into that insurance cover. So they'll have 14 months to do that and so once you've opted in to say that you want to keep it in that large fund then that will just ensure that that insurance stays in place,” he said.

“That is something the members will need to do and if they miss that, then they could actually risk losing insurance cover.”