Insurance: inside or outside super?
Most people can choose to own life insurance themselves, or to set up this insurance through their superannuation fund. But this is not just a simple decision – the way these policies operate and are taxed may change depending on whether they are held inside or outside super.
A key benefit of having life insurance within your super fund is that the premiums are deducted from your super account, rather than your personal account. The disadvantage is that it can reduce the amount of money you have available in retirement.
In some circumstances, the super fund can claim a tax deduction for the cost of the premiums. So it’s tax-efficient because the premiums are effectively paid with pre-tax money. In addition, basic cover may not require a medical examination and this can be beneficial for people who can’t get life insurance directly, for example, due to a pre-existing condition or illness.
However, it’s important to realise that not every superannuation fund offers every type of life insurance cover. Few super funds offer trauma cover because they can’t claim a tax deduction for these premiums. It may not be possible to get the amount of cover that you need, and the terms are sometimes less comprehensive than a policy owned directly.
Another disadvantage is that it’s not always possible to immediately withdraw the money from your super fund even if the insurance policy pays into your account. This is because superannuation was designed as a retirement savings vehicle subject to a strict set of rules controlling access. From 1 July 2013 a beneficiary must satisfy a condition of release as defined in the legislation before receiving any lump sum payment from a Total and Permanent Disability policy held within a super fund.
Anyone can own or be a beneficiary of a life insurance policy owned directly, but the options are narrower for policies held in super because the person must be considered a beneficiary under the super, and may end up paying tax on the payout.
Another option is to take out cover both through super and directly, and in fact, this combination may sometimes offer the best solution. To find out what would work best in your circumstances, come and talk to us.