Most people understand the importance of personal insurances to protect their families. In some cases, insuring through a superannuation fund can maximise the effectiveness of your policies.
Holding personal insurance cover through a superannuation fund has a number of advantages including:
- Premiums can be cheaper due to the bulk discounts available to superannuation funds;
- Many funds provide automatic basic cover without the need for medical questionnaires or assessments;
- It can be more tax-effective, as premiums are paid from the superannuation account with pre-tax dollars, rather than from the member’s after tax dollars; and
- Paying insurance premiums automatically from the superannuation account means there is no impact on household cash flows.
But there is a downside to be considered as well. The potential disadvantages of holding insurance through your superannuation fund are as follows:
- The limited level of over available may not fully protect your family;
- Some types of cover may only protect you for a short time in the event of a pay-out;
- If you have multiple superannuation funds, you may be paying for more cover than you require by being insured within every fund;
- If you change employers or superannuation funds, your insurance cover may lapse;
- Your insurance cover may automatically decrease/cease as you get older/reach a certain age; and
- Insurance pay-outs may be delayed, as benefits are paid first to the superannuation trustee, who then distributes them to beneficiaries.
So which personal insurances are suitable to be held via superannuation, and which are better held outside?
Life Insurance
Term life insurance pays a lump sum on the death of the person insured; this type of insurance works well inside superannuation. Many funds offer a default level of cover that can be altered to suit your needs.
There is an important difference compared with premiums and benefits paid in the non-superannuation environment.
While premiums paid outside superannuation are not tax-deductible, benefits are paid out tax-free. Inside superannuation, premiums are tax-deductible, but benefits are tax-free only when paid to dependants (spouses and children under 18).
Total and permanent disability insurance (TPD)
TPD provides a lump sum if you become totally and permanently disabled, and can be used to cover rehabilitation costs, debt repayment, and living costs.
Within superannuation, TPD pay-outs are subject to tax, but premiums are tax deductible.
Outside superannuation, the reverse generally applies. Policies should be checked as some use the definition of ‘own occupation’ rather than ‘any occupation’ to determine pay-out eligibility. This can significantly affect your outcome in the event of a claim, as benefits can effectively be trapped within the superannuation fund if the person doesn’t satisfy the legislated definition of TPD.
From 1 July 2014, superannuation funds can only offer TPD policies which satisfy the definition of TPD as defined under superannuation law. This will prevent the use of ‘own occupation’ policies within superannuation; however existing policies will be grandfathered.
Trauma insurance
Trauma insurance provides a lump sum benefit upon diagnoses of certain injuries or illnesses, such as heart attack or cancer.
In the event of a claim within superannuation, the payment goes into the superannuation fund, which can only release the money if the member meets a ‘condition of release’ such as reaching age 65 or ceasing employment.
For this reason, trauma insurance is not usually held within superannuation.
Income protection insurance
This type of insurance replaces 75% of your monthly income while you are unable to work due to illness or injury. As premiums are tax deductible to individuals, there is no real tax advantage to holding income protection via superannuation.
In addition, many superannuation fund policies have benefit periods of two years, while policies held outside superannuation provide optional benefit periods up to the age of 65.
Personal insurance is a complex area, and there are pros and cons of holding various policy types within superannuation.
Professional advice can assist you to maximise your cover in the most cost-effective way.
