The attractiveness of superannuation as an investment and savings vehicle is well known. Although the federal government places limits on the amount of tax-effective contributions we can make, the ability to structure insurance arrangements through super remains.
How does insurance through super work?
The types of insurances considered here are limited to those that relate to a person’s life. Specifically, it includes cover for death, total and permanent disability and temporary disability/illness (income protection).
Rather than owning one of these policies directly, you may be able to arrange for it to be owned by your super fund on your behalf. The flow of premiums and claim payments is shown in the diagram below.
Superannuation or personal ownership … what’s best?
The fact that you can hold insurance through your super fund doesn’t mean that in all cases you should. Everyone’s situation is different and it is crucial to seek good advice.
Here are a few key issues to consider
- Cash flow: Having your super fund pay your premiums can free up some of your cash flow for other pressing needs. But don’t forget that the super fund deducts the premium from your account, so you’ll eventually pay for it through a lower retirement benefit.
- Flexibility: Your super fund probably offers one insurer only and the beneficiaries of the policy are limited to those allowed under superannuation laws. Personally held policies allow you to shop around for the best deal, and you have more flexibility to choose who to leave the money to.
- Tax: Super funds can claim a deduction for premiums on death and permanent disability insurance held for their members (usually not available for these policies if held personally). However, tax issues are more likely to arise when these benefits are paid through a super fund in the event of claim.
On the other hand, income protection insurance premiums are deductible when the policy is either held directly or in a super fund. If your marginal tax rate is higher than a super fund’s, then the tax benefit will be greater if the policy is held personally.
- Payment rules: When claiming on insurance through a super fund, it is necessary to meet the insurer’s policy rules as well as the super fund’s rules and relevant legislative requirements. This is particularly important for disability and critical illness policies, as the money may be tied up in super until you retire depending on your super fund’s rules. Lump sum payments paid from a TPD policy held within a super fund cannot be made to the beneficiary unless and until that person satisfies a condition of release as defined in the legislation. This all but rules out the use of ‘own occupation’ TPD policies within super.
As from 1 July 2019, if a super fund hasn’t received any contributions for at least 16 months, any insurance held in the fund may be cancelled. You will need to advise your fund if you wish to continue to hold the insurance.
In some cases, it can be wise to have some insurance inside super and some outside. The best option for you will depend on your personal circumstances, so talk to us when considering any changes to your insurance arrangements.