The Federal Government’s decision to restore a seven-year timeframe on seizing unclaimed life insurance and inactive bank accounts has been praised by the Financial Services Council as “sensible and practical”.

CEO Sally Loane told insuranceNEWS.com.au the time-consuming process and paperwork involved in reclaiming lost money “can be particularly distressing for older Australians and people under financial stress”.

The increase from three years will take effect on December 31, after amendments to the Life Insurance Act and the Banking Act.

The acts stipulate how long life policies can sit unclaimed and bank accounts can stand inactive before they are transferred to the Government.

At the end of January, the Australian Securities and Investments Commission (ASIC) held $79 million from 375,358 unclaimed life insurance policies, an ASIC spokesman told insuranceNEWS.com.au.

It also held $612 million from 265,490 bank accounts.

The Australian Bankers Association estimates that reverting to seven years will halve the number of claims for lost funds.

Money taken by the Federal Government after going uncollected can be claimed via the original life insurer or friendly society.

Prime Minister Tony Abbott says the previous government reduced the window from seven years to three, resulting in $550 million being transferred to ASIC in 2012/13 after $70 million in 2011/12.

“This caused real financial distress for many Australians, including older Australians and community groups, who were not able to access their own funds when they needed them,” he said in a statement.

It took six months for money to be reclaimed in some cases.

The recent Financial System Inquiry recommended the timeframe change and called for transferred money to be held in a separate trust account.

ASIC currently publishes the names and addresses of people owed outstanding money, but due to privacy concerns the Government says it will no longer require the regulator to do this.