Life Insurance inside Super- Yes or No?
While many Aussies still have a laid-back approach for taking personal life insurances. It is the ultimate shield to protect you and your loved one from the unforce events. Importantly, structuring insurances inside or outside super can significantly impact your overall game plan.
Which insurances can be written inside super?
You may include cover for life, total and permanent disability and income protection inside your super. On the other hand, you cannot hold trauma policy inside super due to a change in the regulation from July 2014. The trauma and TPD own occupation policies held inside super before 1 July 2014 are grandfathered, meaning they’ll keep their current terms and conditions. However, you still meet the condition of release from super or SMSF.
It is advisable to get expert advice based on your goals and objectives whether these old grandfathered policies fulfil your objectives based on your current personal circumstances.
The primary perk of insurances inside super is that the premium is paid from your super fund. Therefore, you will not have any out-of-pocket expenses. Similarly, at the time of claim, the payment is also be paid to your super fund.
Is life insurance inside super or SMSF best for me?
Depending on your circumstances, life insurance inside super or SMSF may bring more value than outside super. However, it shouldn’t be considered in all cases.
Here are a few of the issues that you should consider before purchasing life insurance inside super:
- Impacting your retirement savings: Paying premiums from the super fund may undoubtedly free up your cash flow. But then again, it will also lower your retirement benefits if the inflow (super contributions) in your super is lower than the outflow (related costs).
- Taxation: The premium for term life insurance inside super or SMSF is tax-deductible. While for TPD, it will be deductible when you have the policy set up as a Key Person policy which provides revenue protection to the business should the key person become totally and permanently disabled.
On the other hand, premiums of income protection are tax-deductible, both held inside or outside super. However, with a high MTR, income protection outside super will be more tax-efficient than inside super.
Importantly, taxation is more likely to be an issue in the event of a claim when the benefits are paid through a super fund and who is receiving it. It means you need to factor in the tax implication to determine your cover amount.
- Condition of release: Once you get a claim, the lump sum from the life insurance is paid to your super fund. It means you need to satisfy a condition of release under the SIS act. It is essential in the case of the TPD claim. The definition of Total Permanent Incapacity under the SIS Act may differ from the definition of TPD under the insurance contract. Therefore, a lump sum paid from a TPD will be held in your super fund and cannot be accessed unless and until the insured satisfies an SIS condition of release.
- Own occupation Vs Any Occupation: From 1 July 2014, only ‘any occupation’ TPD definitions are permitted to be purchased inside super. Notably, the definition of ‘any occupation’ is broad and often challenging to meet in the TPD claim. For the ‘own occupation’ definition benefit, you may choose to own the TPD policy personally or consider a split TPD alternative.
- Flexibility: Generally, personally owned insurance policies have more flexibility. Particularly choosing your beneficiary. In contrast, beneficiaries for your insurance proceeds inside super are mainly restricted to your dependents.
Notably, from 1 July 2019, if you haven’t contributed or an opt‑in has been received in 16 months, your insurance policy is cancelled. You need to opt-in if you wish to continue the policy.
Whether or not to consider life insurances inside super will merely depend on their personal circumstances and objectives. It is essential to understand the difference and potential implication before you decided to purchase life insurances. Speak to the financial advisor to find the optimum solution.