The Disadvantages of Insurance Through Super
Insurance is commonly held in superannuation without us even realising it. While it’s important to hold insurance cover, it’s important to understand that having insurance inside your super fund isn’t always the best structure and to consider the pros and cons.
In this blog, we’ll discuss what insurance through super is, explore the downsides, and consider some of the benefits.
What is Insurance Through Superannuation?
Superannuation is your retirement savings, a pool of funds that grows over your working life to support you when you stop working.
Many super funds include insurance policies such as:
Life insurance (also called death cover) - pays a lump sum if you pass away
Total and permanent disability (TPD) insurance - pays if you become totally and permanently disabled and can’t work again
Income protection - provides payments if you are unable to work due to sickness or injury
These insurances are sometimes automatically included when you open a super account and start working and contributing. Below are some of the drawbacks to consider.
1) It Can Reduce Your Retirement Savings
One of the biggest disadvantages of having insurance inside of your super is that it can slowly eat into retirement savings.
Depending on the fund, your insurance premiums may be deducted weekly, monthly or yearly. Paying the premiums keeps the cover active but this often means less money is left to grow for your future.
Over many years the impact of paying the premiums can add up to thousands or potentially tens of thousands of dollars that won’t be there when you retire.
2) You Might Not Be Covered for Everything
Insurance offered by super funds generally comes with more basic or standard features. This means they may not cover everything that you require.
Another key thing to consider is that super funds can’t hold new trauma policies. Trauma cover pays a lump sum if you are diagnosed with a serious condition like cancer, stroke or a heart attack.
Due to super fund rules this cover cannot be held within super, and to hold this cover it would need to be owned personally. Therefore, if you only consider holding insurance within super you may be missing out on an important type of insurance cover.
3) It May Be Harder to Claim
The rules for insurance claims inside of super are different compared to insurance held in your own name.
When you make a claim, the insurance company doesn’t pay you directly. The money firstly goes to your super fund, and then is released according to superannuation and fund rules. This can make the process slower and more complicated.
4) TPD Payments May Be Taxed
One of the big surprises for many people is that TPD insurance payments can be taxed if they’re held inside superannuation. This means that if you claim on your TPD policy through your super fund, you might not receive the full amount you are covered for.
Superannuation is firstly a tax-advantaged environment designed for holding retirement savings. The government applies tax rules when you access your super before retirement including for TPD claims.
The amount of tax you may pay will depend on your age when you receive the payment, your total payout amount and the taxable components of your super fund.
5) You May Lose Your Cover Without Realising
Insurance inside of super isn’t guaranteed to stay active. There are certain rules that can cause your cover to stop without you knowing.
Here are a few examples:
If your super account has stopped receiving contributions. Under the protecting your super legislation, if your account has not accepted a contribution for 16 months, your insurance might automatically be cancelled.
If your super balance drops below a certain threshold your cover may cease. Generally if your super fund balance is below $6,000 you may be impacted by these rules.
It’s important to regularly check your super account and keep an eye on the balance and insurance status. For those that change jobs, take a career break or start a family, it’s important to speak with your fund to discuss your options.
6) Limited Choice and Control
When you take out cover inside of super through your fund you often don’t have a choice over the features or benefits of the policy.
Most super funds offer what is called group cover, which means the same standard insurance is offered to lots of people within the fund together. This can make the cover cheaper in some cases but also less tailored to your personal situation.
You might not be able to:
Choose the exact amount of cover you want and be fixed to your needs
Add extra cover features
Benefits of Insurance Inside Super
Despite the drawbacks, the good news is that most of the downsides can be avoided with careful planning and structuring. Below are some of the benefits of holding cover within super.
1) It Doesn’t Impact Personal Cashflow
One of the biggest advantages is that you don’t have to pay for the premiums personally and as such it doesn’t impact your personal cashflow.
This can help to manage your personal cashflow and make the premiums more manageable. If you are paying a mortgage or starting a family, paying for insurance within super can take some of the pressure off you.
2) Tax Deductible Insurance Premiums
The super fund may be able to claim a tax deduction for the insurance premiums it pays. This can help to reduce the overall cost and impact on your super balance compared to buying the same cover outside super (where premiums are generally not deductible unless the policy is income protection).
3) You Can Still Get Tailored Cover - and Pay Through Super
While the insurance offered by most super funds is basic group cover, there is another option that can be tailored to your needs which is called retail insurance.
Retail insurance means applying for insurance cover directly through an external insurer, that is tailored to your personal situation. Taking into account things like your job, health, income and lifestyle needs.
This cover is underwritten, meaning you disclose your health details upfront, it is assessed and then goes into force.
The premiums can still be deducted from your super fund. The benefit is that retail insurance gives more control, features and options to choose from. This can be a good solution for those that want to hold cover within super which is tailored to meet their individual needs.
Retail cover can also generally be applied with a mixture of cover held inside and outside of super. This helps to address some of the drawbacks of cover offered by super funds.
4) Contributions To Help Cover Premiums
For those that are concerned with the longer-term impacts of paying for insurance via retirement savings, you may consider using the contribution system to offset the cost.
In some situations, and depending on the individual’s situation, cap limits and age, contributions to super can assist to offset the cost of insurance premiums, helping to take some burden off the fund and reducing the longer-term impact on the overall balance.
It’s important before making any contributions to review the superannuation contribution limits and to consider your situation and needs.
When considering insurance cover, it’s important to consider your options, the different types of cover, and what you require for your life situation. Although insurance may seem like a set and forget, it’s worth checking regularly to ensure it’s still right for you.
After working as an advisor for a decade, Joel founded Unified Wealth.
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