Life insurance within and outside of superannuation explained.
Since the abolition of the Reasonable Benefit Limits (amount of superannuation that can be received on a concessionally taxed basis) on 1 July 2007, more and more Australians are beginning to hold their life insurance inside their superannuation funds. Many funds now also offer a default level of cover to members.
While life insurance within superannuation can offer tax benefits to its policy owners, there are some drawbacks that may make taking out a standalone life insurance policy a more suitable option.
Benefits of life cover through superannuation
The affordability of premium payments is often the main driver for people to take out cover through their superannuation. Premiums can be funded with members’ existing super funds that have accumulated instead of their after-tax income, with some members also being entitled to government co-contributions. This means that members do not have to dip into their after-tax income to fund their cover, so it will have little or no impact on their day-to-day budget.
Members can enjoy the convenience of having their insurance funded directly from their super and not worry about making their next premium payment. In addition, large superannuation funds will purchase policies in bulk, giving them access to group discounts and the ability to reduce premiums for members.
Life insurance through superannuation will also generally have reduced medical underwriting requirements to standalone policies, allowing people to avoid undertaking medical exams to take out small amounts of cover.
Disadvantages of life cover through superannuation
One of the main drawbacks of insuring through superannuation is the restriction on types and levels of cover available compared to stand alone policies. Essentially, insuring through super does not provide the same comprehensive protection of purchasing a tailored policy outside of super.
Secondly, while there may be tax breaks for premium payments, benefit payments to non-dependents can be taxed at 16.5 per cent.
The Superannuation Industry (Supervision) SIS Act recognises dependents as the member's legal representative, spouse and child, as well as anyone financially dependent on the deceased or someone with whom the member is in an interdependent relationship. In addition, there can be delays in the actual benefit payment, as the death benefit is first paid to the funds trustee who will then determine which beneficiary will receive the payment. This may be avoided through the use of a binding-nomination, although this option will not always be available, and there is still likely to be a delay as a decision is made.
Finally, it is not unusual for people to have a number of superannuation funds active after changing employers. There may be life cover accumulated in each of these separate funds for which the member is being charged a fee. It is also possible for cover to end without notice if the member changes funds or their employer stops making contributions.
Weighing up the benefits of life insurance inside and outside of super
While life insurance through superannuation has played a critical role in addressing Australia’s underinsurance problem, it is still essential for people to assess how much cover they actually have in place and what they will be entitled to in the event of a claim. No two people are the same and conditions can vary greatly between funds.
It is always worth speaking with an insurance consultant to weigh up the different life insurance policies available before deciding what is most suitable for your situation. Taking out insurance inside and outside of super can be very complex and is never a decision to rush.