Consider the types and levels of coverage you require when determining your personal insurance needs. It is important to pay premium tax efficiently. A second important consideration is how to access insurance proceeds in the event of a disease, accident, or death. Superannuation funds provide three types of personal insurance: life, total and permanently disabled, and income protection.
Some types of insurance, such as trauma cover, can be purchased without a super. Types of insurance can be combined outside the super. Packaged policies can help lower premiums that would otherwise be higher. While starting without a superfund with a TPD or life cover at a young age may be okay, it might not be the best option for someone who is in a stage of life where they have mortgages to pay or children’s schooling to fund.
Inside or outside?
The big question is how much coverage to provide. Insurance companies that offer cover for superannuation funds can set caps on the level of cover. Insurers may be more flexible outside the super but will still base their levels of coverage on factors such as age and health. Fund members who offer insurance are not required to undergo a medical examination. The funds distribute the risk among their members more evenly. It is possible to get cheaper premiums outside the super environment. Factors like age, health, job risk, and lifestyle are important. Insurance is provided on an individual basis, and each case must be considered. This allows for greater flexibility or personalization.
A policy can be affected by superannuation policy restrictions, definitions of block policies, and the level of customization. Superfund insurance policies can be less flexible. Fund members are less likely to be consulted when it comes to automatic covers. Customization begins outside of super. It is easier to know what level of coverage you have and who pays for it.
Tax Efficiency and Premiums
Tax-effective personal insurance is impossible for most superfund members without one. Employers pay premiums through compulsory super contributions or concessional contributions, such as salary packaging/sacrifice. The tips are produced from the income of high-income earners or those who deposit more than the concessional contribution cap.
The premiums for TPD or life insurance that you pay outside of the superannuation fund are not tax-deductible. They must be paid after tax. Tax-deductible tips for income protection are available.
Superannuation can be a tax-efficient way to pay for insurance premiums. However, it would be best if you also considered the tax that is applicable when dependents receive proceeds from an insurance policy. The proceeds of TPD and life insurance are tax-free for beneficiaries. Life insurance proceeds paid by super funds are taxed when paid to an adult child, a non-dependent child, or as a source of income.
TPD benefits can be taxed based on your age and the component of benefits you receive, along with whether or not you get a lump-sum payment or a regular income. Income protection benefits can be assessed as income and are taxed at a rate outside the marginal tax rate. This is true whether or not they’re held within super. Insuring via super has another benefit: premiums do not have to be paid out of pocket.
There are no simple or correct answers when it comes time to decide whether you want to be insured within or outside of a superfund. The unique needs and circumstances of each individual determine the solutions. This is not a decision that can be made and then forgotten.
The SMSF Question
Trustees of self-managed super funds must show that they have taken into account insurance options for fund members. Insurance works in an SMSF, much like a retail fund. The fund’s trustees own the insurance policies, and the premiums paid are deducted from the fund’s balance. Insurance policies in these funds are able to be customized and must comply with superannuation regulations, which limit the amount of coverage.
The Best of Both Worlds
Most estimates say that more than 70% of all life insurance policies are held in super. Life insurance pays out a lump sum upon death or diagnosis of terminal disease. TPD provides a lump sum if you are disabled and cannot work. Superfunds offer life insurance coverage for Australians. It is shocking to learn that 95% of Australians are underinsured.
This is cheaper. This also allows for further discounts to be negotiated with employer-sponsored plans. When premiums are taken out of the super, your take-home pay is not affected. Tax benefits and the automatic acceptance of coverage are also benefits.
The level of insurance and coverage can be restricted. If contributions are not made to the super, paying insurance premiums in the super may decrease the balance. Insurance costs can be doubled if more than one super fund is used. The life insurance claim must consider all claimants and beneficiaries, so it is important to update binding nominations. Payment may be delayed, and coverage through super ends when you reach 65 or 70. Some benefits may require tax payment.
The conclusion of the article is:
There are many benefits to choosing insurance in super. If you already have super insurance and change employers, you will need to apply for new insurance. Your health history may be viewed differently by a new insurer. For insurance in supers, there is no need to check your medical record if you are automatically accepted up to a certain amount. Pre-tax dollars are used to pay the premiums, which makes them cheaper. Insurance outside of super is more expensive but also allows for portability. Each option comes with its own set of risks and rewards. It is important to consider what suits each individual.