For effective personal insurance cover there is much to consider:
- What types and levels of cover do you require?
- Are you paying your premiums tax-effectively?
- How and when do your beneficiaries access your insurance proceeds after death?
- How do you access proceeds in the event of a serious illness or injury?
- Can proceeds be accessed early if necessary?
Types of insurance
Many superannuation funds offer three basic forms of personal insurance. These are life, total and permanent disability (TPD) and income protection. Other types of insurance, such as trauma cover, generally cannot be held within super.
Outside your super fund, you can mix and match types of cover.
Policies can sometimes be packaged with one provider and this might be a way to lower premiums, which could otherwise be more expensive.
Levels of insurance
Automatic, and typically low, levels of life or life and TPD cover within a super fund can be fine for a young person starting their first job.
But for somebody at another life stage – with a partner, children and a mortgage, for instance – it can be a different story.
Insurers providing cover within super can put caps on their levels of cover.
It is important to make sure you ask your fund about these limits and levels.
Outside super, the levels of cover might be more flexible, but this will also depend on your age and health.
Fund members automatically offered insurance often do not need to undergo a medical check-up. The funds instead spread risk among their members.
At the same time, while it can be possible to find cheaper premiums outside of the super environment, considerations such as age, health, lifestyle and job risk matter.
As insurance is offered on a case-by-case basis, individuals are treated as just that - individuals. For some this can mean higher premiums, but it can also lead to greater flexibility and customisation.
Thanks to superannuation law restrictions, which restrict policy definitions and the level of customisation that can occur to a policy, insurance policies within a super fund can be less flexible.
Automatic covers usually require little, if any, consultation with the fund member. This may or may not suit a member’s needs.
Policies outside super begin with a customisation process. This can be important for those that require specific levels of cover, and for policy holders that want to be sure of what is covered and of how, when and to whom payments are made after an insurable event.
Tax effectiveness and paying premiums
For many fund members it is difficult to beat the tax effectiveness of personal insurance paid within a super fund.
Premiums are often paid out of compulsory super payments made by your employer or voluntary concessional contributions such as salary sacrifice.
In addition, your super fund can generally claim a tax deduction for premiums it pays.
This means that unless you're a high-income earner or depositing more than your annual concessional contributions cap, the premiums are generally paid from income that has not been taxed.
In contrast, life and TPD insurance premiums you pay for cover outside super are generally not tax deductible and therefore effectively paid from after-tax money, although premiums paid for income protection insurance are often tax deductible.
While superannuation may be a more tax-effective way to pay your premiums, it is also important to consider the tax that applies when you or your dependants receive your insurance proceeds.
Life and TPD insurance proceeds held by you personally are generally received by you (or your nominated beneficiaries) tax free.
In contrast, life insurance benefits paid from super can be subject to tax if paid to a non-dependant such as an adult child or in some cases, if paid as an income stream.
TPD benefits paid from your super may be taxed, depending on your age, the component in your benefit and whether you receive a lump sum or income stream.
Income protection benefits are generally assessable as income and taxed at your marginal tax rate, regardless of whether you hold the cover in super or outside super.
Another benefit of insuring through super is that you don't have to pay the premiums from your own pocket. However, at the same time these premiums could be eating away at your final super balance.
The question of insuring within or outside a super fund, or a mix of both, is one with no right or wrong answer.
The solution lies with the needs of each individual and once you have settled on the answer, it is not a set-and-forget decision.
With each life stage and major event - marriage, childbirth, mortgage, pay rise - comes new and different responsibilities.
So you might want to schedule an insurance review in your budget or financial planning every now and then. You can talk to a financial planner about what your options might be at any particular stage.
What about SMSFs?
Trustees of self managed super funds (SMSFs) must be able to prove that they have ‘considered’ insurance for the fund’s members.
Inside an SMSF, insurance operates much the same as it does in a retail fund. The policies are owned by the trustee of the fund.
Premiums are generally paid by the fund from within each member’s fund balance and are generally tax-deductible to the fund.
The added benefit over certain insurance policies within retail funds is that the insurance policies within SMSFs may be more customisable but still need to comply with superannuation rules restricting the types of cover that can be held.
It can be a best-of-both-worlds situation, combining tax effectiveness with flexibility.