For effective personal insurance cover, you need to consider the levels and types of cover required. Payment of premium tax effectively is also important. Another crucial consideration if how insurance proceeds can be accessed following disease, injury or death. Superannuation funds offer three forms of personal insurance– these are life, total and permanent disability and income protection.
Other types of insurance like trauma cover can be without a super. Outside the super, types of cover can be mixed and matched. Policies can be packaged with one provider and this could be one way to lower premiums which would otherwise be more costly. But while at young ages, starting without a super fund with a life or TPD cover may be fine, it may not work out so well for someone in a life stage where mortgages have to be paid or children’s education has to be funded.
Inside or Outside?
That is the big question while providing cover. Insurers providing cover within the super can place caps on cover levels. Outside the super, levels of cover may offer more flexibility but this will, in turn, be based on age and health. Fund members offering insurance do not need to opt for medical checkup. These funds instead allocate risk more evenly among members. Cheaper premiums may be possible outside of the super environment too. But factors like age, lifestyle, health and job risk matter. Insurance is offered on a by case basis and individuals have to be given due consideration leading to greater flexibility or customisation.
Superannuation legal restrictions, block policy definitions and level of customisation can influence a policy. Insurance policies within a superfund can have less flexibility. Automatic covers require less consultation with fund members. Outside the super, policies start with the customisation process. This makes it easier for those who want surety about specific levels of cover and for policyholders to be sure of what is covered and how, and whom the payments are made following an insurable event.
Tax Efficiency and the Question of Premiums
For most fund members, tax effectiveness of personal insurance is not possible without a super fund. Premiums are paid out of compulsory super payments by employers or concessional contributions like salary packaging/sacrifice. This means a high-income earner or those depositing more than concessional contribution caps will pay premium from income not taxed.
As against this, TPD and life insurance premiums you pay for cover outside the super are not tax deductible and paid from after-tax money. Premiums for income protection insurance are deductible in terms of tax.
While superannuation is a tax-effective way to pay premiums, it is important to consider tax that applies when dependents receive insurance proceeds. Life and TPD insurance proceeds are received by beneficiaries or self-tax free. On the other hand, life insurance benefits paid from super funds can be taxed if paid to a non-dependent or adult child or as an income stream.
Based on age, and component in benefits, as well as whether you receive a lump sum or income stream, TPD benefits may be taxed. Income protection benefits are assessable as income and taxed outside marginal tax rate, regardless of whether the cover is held in super or outside super. Another benefit of insuring through super is that premiums don’t have to be paid from your own pocket.
So, when it comes to insuring within or outside a super fund, there are no easy or right answers. Solutions are based on the unique needs of the individual and this is not the set and forget type of decision.
The SMSF Question
Self-managed super funds trustees must prove they have considered insurance for the fund’s members. Within an SMSF, insurance operates in much the same way as the retail fund. Trustees of the fund own the policies, and premiums are paid by the fund from the fund balance and are tax deductible. An added benefit is that insurance policies within these funds can be customised and needs to comply with superannuation rules placing a limitation on covers had.
The Best of Both Worlds?
More than seventy percent of life insurance policies in Australia are held inside the super, according to most estimates.Life insurance yields a lump sum on death or diagnosis of terminal illness. TPD pays up when you become disabled and unable to work. Super funds provide life insurance cover for Australians. But what is astounding is that nearly 95% of the population is underinsured.
It works out to be cheaper. It also ensures further discounts can be negotiated when employer-sponsored plans are considered. If premiums are deducted from the super, the take-home pay will not be touched, The tax benefits and automatic acceptance of cover are other benefits.
Insurance and level of cover may be limited. Paying insurance premiums within the super could decrease super balance if the super is not offset by contributions. If more than one super fund is used, insurance costs may be doubled up. All claimants and beneficiaries of the life insurance claim need to be considered, so binding nominations must be updated. There may be a delay of payment and cover through super ends at 65 or 70 at most. Tax may be paid for some benefits.
The upside of choosing insurance within super are many. If you have insurance inside super and you are changing employers, however, new insurance has to be applied for. A new insurer may not look at your health history the same way. Automatic acceptance up to certain amounts needs no medical history check-up for insurance within supers. Premiums are paid with pre-taxed dollars and are therefore cheaper. Insurance outside super means extra taxation, but it also yields portability. All said and done, each option has its own risks and rewards. What suits the individual matters the most.