With increasing commentary about the "under-insurance" of Australians, it is likely that a growing number of superannuation fund members will consider the option of taking out insurance through their superannuation fund.
For members, there are advantages and disadvantages in holding personal insurance cover through their superannuation, largely depending on the type of insurance policy.
Which personal insurances are most suitable to be held via super, and which are better held outside, are questions that people may consider when choosing which policy best suits their needs.
Generally speaking, the advantages of holding insurance through super include:
- Members may be able to access lower premiums due to the bulk discounts available to super funds
- They may not need to complete a medical questionnaire or assessment if the fund provides automatic basic cover
- It may be a tax-effective option as they can pay premiums from the super account, where most of the money has been taxed at 15 percent, rather than at the personal marginal tax rate
- In addition, paying premiums automatically from the super account means there is no impact on household cash flow which continues to be an important consideration for many Australian households.
Potential disadvantages include:
- The limited level of cover available may not fully protect their family as comprehensively as an insurance policy out super
- Some types of cover may only protect members for a short time
- Insurance cover may lapse if there is a change in employer or super fund
- Insurance payouts may be delayed, as benefits are paid first to the trustee who then distributes them to beneficiaries.
From this, it is possible for members to identify which types of insurance are best held in superannuation and which are best held outside.
Usually, they find that life insurance is best held inside superannuation, but total and permanent disability (TPD), trauma and income protection insurance policies are more beneficial outside super.
TPD can vary because, within super, TPD payouts are subject to tax, but premiums are tax deductible. Outside super, the reverse generally applies.
Income protection insurance is tax deductible to individuals, meaning that there is no real tax advantage to holding income protection via super. In addition, many super fund policies have benefit periods of two years, while policies held outside super provide optional benefit periods up to the age of 65 which many people will find attractive.
Trauma insurance will almost always be held outside superannuation as the payout goes into the super fund rather than the member, which can only release the money if the member meets a 'condition of release' such as reaching age 65 or ceasing employment.
For super funds looking at expanding their insurance offering, these considerations may prove useful in finding ways to fully meet the needs of members in a cost-effective way.
Andrew Buchan is a financial planning partner with accountants and financial advisers HLB Mann Judd Brisbane
