Should Personal Insurance be Inside or Outside Superannuation?

Death cover (Life insurance), Total and Permanent Disability (TPD) and Income Protection insurance should be regularly reviewed as the level of cover required can change as personal and business situations vary. The appropriateness of the existing cover and the most effective method of obtaining the cover, should be reviewed annually or when any significant personal or business change occurs. Personal insurance is specific to an individual’s situation and can be complex, so professional advice from a suitably qualified person should always be sought before acting.

The advantages and disadvantages of personal insurance held within a superannuation policy, is often an area of uncertainty when assessing the options available. Below are some of the issues to consider in this area:

Advantages:

• A default minimum level of life cover is automatically offered to all non-SMSF, super fund members

• Premiums are often cheaper because super funds can bulk buy policies

• Easy to manage as premiums are automatically deducted from super contributions

• Less administration, such as medical checks, for basic cover

• Tax advantages may exist as premiums are paid from the superannuation account, rather than from after-tax income

• No impact on day to day cash flow

Disadvantages:

• Insurance premiums paid from superannuation contributions are included in the concessional contributions cap, therefore reducing the total dollars available for superannuation investment (ie: a smaller amount to invest for retirement income)

• The level and type of cover offered by the fund may be limited and not adequate to cover the identified risks

• Superannuation trustees may take longer to process benefits. Trustees need to determine if the condition of release conditions have been met for disability claims, or that all claimants have been considered, or a valid binding nomination is in place for death benefit payment. For policies held outside super, payment is generally a faster process.

• If a binding beneficiary nomination is not made, or the fund does not offer binding nominations, the super fund trustees will determine who receives the death benefit payout, not the insured (ie: less control)

• Income protection is paid to a maximum of two years for policies held within super

• Lump sum TPD payments are taxed according to the insured’s age, after a tax-free component has been deducted. This net benefit paid can result in a shortfall on the expected benefit, if tax is not accounted for in the level of cover

• Beneficiaries who are not financial dependents (ie: children over 18) will be liable to pay tax on a death benefit payment, whereas the same benefit paid directly from a policy held outside super would be tax-free no matter who received it.

• Due to the potential impact of tax on insurance benefits paid from policies held within superannuation, the cover required may need to be significantly higher than the risk to be covered.

Regardless of where the insurance is held, it is always better to have some insurance rather than none, but it is worth knowing exactly what the insurance policy will and will not pay and under what circumstances, to ensure it covers the important risks should an adverse outcome occur.