Life Insurance in Super
Some types of life insurance products are a common inclusion in superannuation. A fund will often automatically take out certain life insurance policies on your behalf when you join it. The premiums for holding the insurance are deducted from, and any benefits received from the insurance policy are credited to, your account. For this reason, it is essential to check your superannuation fund before you purchase any life insurance products to ensure you aren’t doubling up unnecessarily.
Not all life insurance policies should be held within your superannuation fund. There are a number of factors to consider when deciding to insure yourself directly or through a superannuation fund.
Cost of insurance
Superannuation funds can have tens of thousands of members all requiring insurance. This gives the superannuation fund a great amount of buying power that it uses to secure low premiums for its members. Conversely, if you were to take out insurance directly, you would be paying the full retail price, which can be substantially more.
Ability to receive benefits
This is a tricky one and an area where people can easily come unstuck. If your insurance policy is held within your superannuation fund, the benefits of your insurance policy, if an insured event occurs, will be paid into your superannuation account. Once paid into your super account, the superannuation company will release your superannuation benefit to you, including the insurance benefit. However, should you suffer an insured event that does not satisfy a superannuation condition of release, then the insurance benefit will remain in your superannuation fund. It is for this reason that income protection insurance is generally recommended to be held outside a superannuation fund.
If you were to sustain an injury that satisfied the payment of a benefit under income protection, the proceeds would be paid to your superannuation fund. For the fund to release the benefits to you, you would also need to fulfill the conditions of release of superannuation. Given that the condition of release of superannuation is far stricter than an income protection policy, a situation may arise where the benefit is paid to the superannuation fund, but the fund can’t release the benefit to you. The same is also true, to a lesser degree, for total and permanent disability (TPD) insurance. Holding these types of personal insurance products inside superannuation may leave you with no money and no access to insurance when you need it most.
Tax implications
Generally, when held inside a superannuation fund, premiums for term life, total and permanent disability, and income protection insurance are tax-deductible to the life insured.
However, you are funding the premiums from your employer’s contributions or salary sacrifice, which are essentially taxed at 15%, as opposed to funding the premiums out of pocket which you have paid a marginal tax rate on.
General recommendations
The general consensus is that people purchase term life and total and permanent disability (TPD) insurance inside a superannuation fund given the low cost and tax efficiency for the funding of the premiums. For income protection, it should be held outside of super to ensure benefits can be accessed if an insurable event occurs.