Australians are notoriously underinsured, so it’s reassuring to know that affordable, tax-effective life insurance could be as near as your super fund. Most super funds offer members at least a basic level of personal insurance cover, and holding your insurance within super – rather than in stand-alone policies – can have its benefits.
Tax efficient insurance premiums
Whereas in a stand-alone policy you would typically pay premiums from after-tax earnings, within superannuation they can be paid from your pre-tax employer or salary sacrifice contributions (which is also less disruptive to your cashflow).
Most large funds can diversify risk due to a larger pool of insured lives and may therefore offer lower premium rates.
Many funds have automatic acceptance for basic levels of cover, with no need for medical questionnaires or examinations.
The combination of cheaper, more tax effective premiums means that you can elect to have a higher sum insured than you would have outside super, for the same price, or maintain the same sum insured but at a reduced cost.
However, structuring personal insurance within super can also have its drawbacks:
With a stand-alone life policy, death claims are usually paid relatively quickly once a death certificate is provided. Within super, however, the trustee of the fund can decide how, and to whom, a benefit is paid so the process can take longer.
A person must meet a ‘condition of release’ before insurance proceeds can be paid from super, which may create an issue for some TPD policies.
While proceeds of stand-alone life and TPD policies are generally paid out tax-free to beneficiaries, insurance benefits within a super fund become part of the fund’s account balance and recipients may be liable for tax depending on how, and to whom, the benefits are paid.
Will it be enough?
People tend to underestimate how much insurance cover they need and will often accept the fund’s default offering. This may be only a basic amount (eg. $100,000 or $200,000) or a fixed multiple of salary, (eg. 3 x salary), when in reality you may need three or four times that amount to protect your family financially.
Erosion of retirement savings
Because you’re using a portion of your superannuation contributions to pay the insurance premiums, less money is available to invest for your retirement.
Talk with your financial adviser
Ultimately, the best way to structure your personal insurance will depend on your circumstances and the level of cover you require, so it’s a good idea to seek advice from your financial adviser.