GALLEON INSIGHTS

Insurance Inside or Outside Super?

Insurance Inside or Outside Super? 

Having insurance through super can be seen attractive option as the premiums are deducted from the member’s super account balance, rather than their take-home pay, which can help to make the cost more manageable.

Insurance Cover through superannuation

Generally there are 3 types of cover that can be structured through superannuation
• Life Insurance
• Total & Permanent Disability Cover – Any Occupation
• Income Protection cover

Insurance premiums will be tax deductible to the super fund and hence for some covers / & in some client situations structuring insurance covers through superannuation can be tax effective. However, superannuation is a long term retirement funding vehicle and insurance premiums can affect the super balance significantly in the long run.

It is common that some super funds may offer automatic acceptance for insurance coverage, meaning that you may not need to undergo medical underwriting or provide evidence of good health to obtain coverage.

It is possible for a client to hold multiple super funds, and in such cases, they can typically have insurance coverage through more than one account. This means that if they have multiple insurance policies, they may be able to claim Death or TPD benefits on each of them.
However, insurance cover through superannuation rules changed in 2019/2020 in order to protect client with low super balance accounts.
• From 1 July 2019,, insurance super funds are required to cancel insurance cover on inactive accounts.
• From 1 April 2020, members under 25 or have a balance less than $6,000 do not receive automatic insurance

If a member wants to keep the cover they may inform the super fund or make a contribution to hold their cover within super.

However, if you are seeking professional advice your adviser will discuss number of facts before making recommending a cover through super.

There are number of advantages as well as disadvantages in having an insurance cover through super.

Advantages of having the cover through super:
• Cashflow: As premiums are paid from super fund balance this frees up cashflow. In a situation where the cashflows are tight, however having the insurance cover is essential, This is an option available to meet both objectives,
• Tax effective: Having a cover through super can be tax effective in most of the cases where the premiums are tax deductible to the fund. However it is important to seek professional advice
• Easy to obtain : Getting a cover through super can be easier as most of the super funds have a default level of cover with automatic acceptance.
• Cover for High Risk Employees : Some staff super funds offer insurance cover for employees in high risk jobs – for example – police officers, pilots etc..
• Can have cheap insurance premiums : Super fund on behalf of large number of members may have high bargaining power and hence may be able to negotiate low premiums for their members.
• Automatic payment : Once the cover is set up, as far as there is sufficient funds or if you are regularly contributing, insurance premiums are paid without you getting involved.

Disadvantages of having the cover through super:
• Reduces Super Balance: Make no mistake – Insurance premiums are a cost. If funded from super insurance premiums will erode your super balance. Unless you contribute extra insurance premiums can cause a significant dent to your retirement funds over time.
• Taxation of benefit payments : Depending on the beneficiary/situation, insurance benefit payment can be subjected to tax.
• Delays in Claim : Once structured within super, getting your benefit paid is a two way process. Once the benefits are paid by the insurer, Super trustee needs to release your payment and this may take time.
• Benefit can get stuck in super: There is also a chance that the benefit payment can get stuck in super until a condition to release is met by the super trustee.
• Cease of cover upon rollover: There is a danger that the cover you held inside being cancelled if you rollover funds without paying attention to insurance cover within super.
• Cover limitations : Unless your cover is designed and structured by a financial adviser an automatic cover has – generally speaking – lower sum insured, basic features, can be a unitized cover & so on
• cover can get terminated: Insurance cover within super ( unless a retail cover being designed by an adviser), can get terminated upon reaching a certain age.
• Nomination of beneficiary: Nomination of beneficiary needs to be regularly reviewed. Also a non binding nomination can get challenged and nomination of beneficiary needs to be carefully designed to minimize tax upon payment.

The decision to have the cover inside or outside super depends on personal circumstances/ goals and objectives. Therefore it is always best to speak to your adviser and consult professional advice.

NOTE : At Galleon Capital & Advisory, we provide free insurance advice. (We may get remunerated for implementation of cover by the product provider). To learn about our company, services, process, fees and contact details please visit our website www.galleoncapital.com.au

By : Shan Muthukuda | CERTIFIED FINANCIAL PLANNER®

Galleon Capital & Advisory Pty Ltd (Corporate Authorised Representative No. 001301679) and Shan Muthukuda (Authorised Representative No. 001233173) are authorised representatives of Spark Advisors Australia Pty Ltd ABN 34 122 486 935 | AFSL 380552.

General Advice Warning: “The information in this document has been prepared for general information purposes only and does not take into account your personal objectives, financial situation or needs. It is not intended to provide commercial, financial, investment, accounting, tax or legal advice. You should, before you make any decision regarding any information, strategies, or products mentioned in this document] consult a professional financial advisor to consider whether it is suitable and appropriate for you and your personal needs and circumstances. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product, together with the Target Market Determination (TMD)”.

 

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