Making the Most of Super 3 of 4: Super and Insurance

Research in 2013 revealed that most of those surveyed didn’t know what insurance cover was included in their super accounts, and whether it was appropriate for their needs. Additionally, about 73% of respondents didn’t understand insurance in relation to super. [1]

While there can be many advantages of holding your insurances inside superannuation, it is important to seek professional advice so that your risk strategy decisions are appropriate for your personal circumstances and integrated within your overall financial strategy.

Insurances & superannuation

Superannuation is among the most effective retirement savings strategies available for Australians. As well as the many tax concessions associated with super, the Government allows tax effective options for purchasing personal insurances, including Life Insurance, Income Protection Insurance and Total and Permanent Disability Insurance (TPD), through your superannuation fund. It is estimated that 83% of superannuation fund members use the default insurance policies[2].

Advantages of holding insurances inside your superannuation fund

There can be cost advantages associated with insurances held within superannuation funds. Many superannuation funds will offer reasonably priced policies as part of that institution’s group insurance policies, although increasing claims over the last few years has resulted in significant increases in some group insurers’ premium prices. Typically these policies offer a basic level of cover only.

Further, holding insurance policies within your super can give you the flexibility to pay for the premiums from your before-tax income or your after-tax income, however it is important to seek advice to determine which option is most appropriate for your personal circumstances.

The default insurance policies within superannuation often include Total and Permanent Disability (TPD) and Income Protection as well as Life Insurance and usually minimal medical information is required for the basic levels of insurance coverage.

Is it what it’s cracked up to be?

While holding personal insurance through superannuation may be a tax effective option for some; there are some pitfalls and other factors that need to be taken into account.

Perhaps the biggest concern associated with most insurances held within super is that the insurance is not tailored to your specific circumstances and stage in life. Most default insurance policies within super are not underwritten which means you are not required to provide personal health or financial information until you claim. This can result in your claim not being paid.

Not only can this result in policies being more expensive, but it could also mean that you are not adequately insured and this could result in dire financial consequences for you and your family if the unexpected were to happen. It is estimated that half of industry super fund members are underinsured by $100,000 for Life Insurance and by $1,000 per month for Income Protection insurance.[3]  This default insurance cover which is not underwritten is usually automatically provided within your superannuation fund. It is possible to arrange to have an underwritten policy within your super, which can be more cost effective than the default policy.

If you change jobs and your employer super contributions stop, or if you move to a different super fund, your personal insurance cover may end without notice or you could be subject to waiting periods, leaving you without insurance cover.

Paying premiums from your super fund can also affect the amount of money available within the super fund for investment. This can have a significant impact on retirement savings. Personal insurance premiums usually increase as you age meaning you could erode your superannuation savings as you move closer to retirement.

Risk protection is an important part of your overall financial strategy and your insurance protection should align with your Estate Planning and the wishes you have outlined in your Will. Often the decision about distribution of funds from a superannuation fund rests with the Trustee of the super fund which could mean that benefits or entitlements in the event of a claim may not be paid to whom you intended.  These complications are less likely when insurances are held outside of superannuation.

There can also be other legal and financial complications associated with insurance claims held within super, which could leave your beneficiaries facing unexpected tax liabilities with some entitlements being considered assessable income for certain beneficiaries.

Your loved ones could also face lengthy delays due to conditions of release or other clauses associated with superannuation funds, which may not be the case for insurance policies held outside of super.

Understanding the claims process and the full implications of holding your insurance within superannuation should be discussed with your Fortnum financial adviser. The complexity of personal insurance options and importance of adequate and appropriate insurance cover for your stage of life and needs, should never be underestimated.

Review your super with your Stratus adviser

We hope you take us up on our invitation for a discussion any aspects of your super and how your super is integrated with your whole-of-life financial planning. Please call (07) 3007 2007, or contact us via our website.


Related Stratus articles:

Types of Insurance
Life Insurance within Superannuation
The Misinsurance Phenomenon

Making the Most of Your Super Series:

  1. Contributions
  2. Structures & Investments
  3. Insurance
  4. Estate Planning

 


[1] http://www.superannuation.asn.au/policy/reports
[2] http://www.canstar.com.au/superannuation/life-insurance
[3] Sweeney research. A joint report by The Australian Institute of Superannuation Trustees (AIST) and Industry Funds Forum (IFF) 2008


Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Stratus Financial Group strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.

Taxation outcomes are illustrative only. Always confirm your tax position with a registered tax agent.