Looking to buy personal insurance? We explore the advantages and disadvantages of holding insurance through your super.
Whether you’re starting a family or have a mortgage to pay, it’s important to take out insurance, so that you’re covered in case something happens. And if you’re heard about buying personal insurance through your super, you may be wondering whether it’s a good idea or whether there are there drawbacks.
Insuring the smart way
If you’re working, you may have some personal insurance cover in your super fund. If so, it is probably the default level of cover offered by the fund and may not account for your personal circumstances. Insurance cover in super typically pays a benefit if the super account holder dies or becomes totally and permanently disabled. Sometimes, employers also organise for income protection insurance to be included in their corporate super plan for their employees.
Once you’ve collected information on what insurance you have now, we can help you work out whether you need additional insurance, what type of insurance is right for you, how much extra insurance cover you may need and the best insurance provider for you.
What cover is available in super?
- Life insurance pays a lump sum if you die, which can help your family pay off the mortgage and other immediate debts, and can be invested to provide for the ongoing needs of your family.
- Income protection pays a percentage (generally up to 75%) of your regular monthly income if you can’t work due to sickness or injury, to help you and your family pay the bills.
- Total and permanent disablement cover pays a lump sum if you are unable to work ever again, due to being totally and permanently disabled, which can help pay for medical and rehabilitation costs.
The case for insurance in super…
- In some cases, holding insurance through super can be cheaper, because the trustee of the super fund can negotiate lower premium rates in its policy with the insurer, due to the number of members in the fund taking out cover.
- There may be a tax advantage, because you can pay for your premiums using pre-tax income.
- It helps with cash flow, as you don’t have to pay premiums out of your take-home pay.
- It’s easy to manage, because premiums are automatically deducted from your super account balance.
- Some funds automatically accept you for cover without checking your health or finances.
…and the case against
- Using your super to pay for insurance premiums may affect your retirement savings balance.
- The range of policies and level of cover available may be more limited.
- If for example, you move jobs or take an extended period of leave, you may need to monitor your existing super fund balance regularly to ensure you have enough money to pay for premiums so you don’t lose your insurance cover.
- Some beneficiaries may need to pay tax on some benefits received on your death.
- You can nominate who you would like to receive your superannuation benefit (including any life insurance benefits) when you die. However, unless you make a binding nomination, it is ultimately the trustee who decides who will receive your benefit, although the trustee will consider your nomination when making its decision.
- If permitted by your super fund, you may be able to make a binding nomination, and the trustee must generally pay your benefit to the beneficiaries you have nominated. However, you’ll need to renew your binding nomination regularly as it only lasts for three years.
- It could take longer to receive your insurance benefits, as the insurer pays the benefit to the fund trustee, who then distributes it to you or your beneficiaries. And there may be more stringent conditions of release for disability benefits.
Best of both worlds
As well as protecting your wealth, you’ll also need to think about tax implications and planning your estate. For some people, holding insurance both in and outside super is the suitable solution, but whether this is right for you will depend on your personal circumstances. So, call us today to discuss more.
What you need to know
Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning Pty Ltd and other companies within the AMP Group will receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.
