When it comes to arranging insurance it's important to decide what types of insurance are available to you and what you'll need for your particular life circumstances. From here you'll need to consider whether you should keep it inside your super fund or set it up separately.
What are the benefits of insurance through super?
1. Get more for less
It can be cost effective to buy insurance through super. That doesn’t mean you won’t find cheaper cover outside your super fund. But it’s likely you’ll be better off because tax benefits mean you could end up paying less overall and group buying power – which normally comes with insurance through super – often gives you more for less.
2. Boost cash flow
In super you can pay for your insurance using before-tax money rather than dipping into your take-home pay, which can also be a tax-effective way to pay your premiums. Or, you can simply have the premiums deducted from your existing account balance. Be sure to keep an eye on your super balance though – less super may affect your lifestyle in retirement.
3. Access government help
You could make after-tax contributions to your super and use these to pay for your insurance. A payment into your super from your after-tax income is called a non-concessional contribution. This money is not taxed as you have already paid tax on it at your normal rate. There is a $180,000 limit per year, for the current year, on the amount of after-tax contributions you can make. If you do make after-tax contributions to your super, you may be eligible for a government co-contribution.
4. Be covered more easily
You’ll usually be granted insurance cover automatically when you buy through super. Outside of super you may have to submit an application, undergo medical examinations and wait for approval.
What are some of the downsides?
1. Tax on claims
Depending on your circumstances, you may pay tax on disability claim payments when your insurance is held through super. And certain beneficiaries may be subject to tax on death benefit claims they receive. A beneficiary is a person who receives all or part of the deceased estate. If a will exists, it usually sets out how the deceased estate and income should be dealt with.
2. Limited beneficiaries
Payments (following death) can only be paid to superannuation dependants. If you have insurance outside of super there are generally no restrictions (unless your insurer specifies otherwise).
3. Longer timing on payments
When it comes to payments for some policies, including life insurance, total and permanent disablement and temporary salary continuance, the money will normally be paid by the insurer to the super fund first. The trustees can then pass it to you or your beneficiaries in accordance with the fund’s rules and the Superannuation Industry Supervision Act – this means payments can take longer.
4. Restricted types of cover
Cover provided through super can be more limited than a policy held outside super. For example, trauma cover is generally not available through super.
After you’ve considered the pros and cons of holding insurance inside super, you will need to determine the level of cover you need. Your financial adviser can help you to work out how much may be right for you. Regardless of how you choose to buy your cover, be sure you have the right type and amount for your needs.
If you would like further information, please contact your financial adviser.
Source: Capstone, AMP and Australian Federal Government. Published: 10 June 2015