Many people have some sort of personal insurance through their Superannuation fund. Most industry Superannuation funds have default cover; it is simple, convenient and helps the personal cash flow. Too easy!
On the surface it may appear to provide protection for you and your family, but have you looked at it closer? Is your cover really as comprehensive as you think it is, and most importantly will it pay when you need it most?
The convenience of having your insurance through Super can come at a cost. Policies held in Super can be more restrictive than the ones you own personally, so it is essential to know what is right for you.
Insurance inside Super: the pros and cons
Pros:
- can be a cost effective way to obtain cover
- can relieve personal cash flow pressures
- can provide a level of cover automatically without upfront underwriting
- premium(s) may be tax deductible
Cons:
- limited types and quality of cover available
- cover is not necessarily guaranteed renewable
- premium(s) can reduce your available balance to invest in a tax-friendly environment
- premium(s) can reduce your final retirement savings
- benefits may be subject to tax
- trustee of the superannuation fund has discretion as to who should receive the proceeds (without a binding death nomination)
- limitations as to who you can nominate to receive proceeds (with binding death nomination)
- can be slower to pay benefits
- cover generally expires at age 65
- generally will not offer a level premium option
- cover is not indexed at policy anniversary
Different Types of Insurance
Holding personal insurance can certainly be right for some people, but it is best you understand the limitations. Below is a brief summary of each insurance type and the potential consequences you may face if it is in Super.
Life Insurance
- Premiums reduce Superannuation savings and/or ability to maximise investment in tax effective structure
- Superannuation policies where benefits are paid to non-dependents are subject to large tax implications. Policies owned personally can be paid to anyone without tax implications.
Total & Permanent Disability
- New policies in Superannuation are limited to the ‘Any Occupation’ definition.
- Existing policies in Superannuation with the ‘Own Occupation’ definition may have difficulty releasing any benefits paid from the Super fund until a condition of release is met.
- More comprehensive cover available to individuals who personally own their cover.
- Policies owned in a Super fund can receive a deduction for the premium(s) however benefits will generally be partially subject to tax if you are under age 60, whereas policies owned personally are not tax deductible and the benefits are paid tax-free.
Trauma/Crisis Recovery Insurance
- Due to Superannuation law, trauma cover can not be offered by Super funds.
- Trauma insurance covers a large range of common medical events (such as cancer, stroke and heart attack) which will affect a large number of people through their lives.
- Trauma benefits are tax-free.
Income Protection
- Policies held inside Super are restricted to somewhat basic policies with no ancillary benefits.
- Agreed value protection is not available in Superannuation meaning the benefit you receive will be:
– the lower of the amount you are covered for; or
– up to 75% of your pre-disablement income. - The premiums are deductible to either the Superannuation fund or the individual (it depends on who the payer is) however the benefits received are taxed at the marginal tax rate of the recipient.
- The quality of definitions in Superannuation policies are generally significantly inferior to policies held personally.
Depending on the person, the need for any of these insurances varies, but the reality is that the risks are very real, for everybody. It is important to review your insurance frequently, re-assess your insurance needs as your personal and professional circumstances changes and understand what you are covered for – or not covered for.
Where’s the best place to start? Start looking into the details of your Super insurance policy or ask an Insurance professional to review it for you.
At a glance, they will be able to assess whether it is appropriate for you, where you are at in life and your career, and make recommendations. It’s that simple!
If you don’t have an Insurance Consultant or are unsure about your current insurance, contact us, we’d love to help.
Disclaimer: * The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.
The primary purpose of insurance is to ensure that you and your family remain financially protected during otherwise a very emotionally difficult time. Ensuring that your insurance is appropriately structured and providing the comprehensive coverage that you require provides significant piece of mind.
