Are there benefits to holding Life Insurance within Superannuation?
It is widely considered that holding certain types of Life Insurance within Superannuation is acceptable practice. For some people, this is the only personal risk protection they have. The types of insurance typically allowed is restricted to policies that provide benefits that accord with the purpose of the superannuation system. The most common life insurance carried within superannuation, are ‘term life’; TPD; and income protection insurance.
Should I use my superannuation account to own my Life (Death) insurance policy?
In our article ‘Life Insurance and Superannuation linked’ (published September 2013), we discussed in more detail which insurance products could be taken through a superannuation account; and revealing some of the limitations that are imposed through the Superannuation Industry Supervision (SIS) legislation. Since that article was published a number of clients have raised questions as to the benefits – and the pitfalls – of holding life insurance within superannuation so as to protect their dependants from financial risks and obligations should they die ‘prematurely’.
The Pro’s and Con’s of owning life insurance within superannuation accounts –
The Pro’s (benefits/ advantages) –
If taking cover through a group superannuation account (employer, or industry fund usually), cover may be available on an ‘auto acceptance’ basis (not requiring any personal statement or medical reports) – and premiums will initially at least, be at what is known as ‘standard rates’ (i.e., there won’t be any loading for Smoker status/ health issues).
Insurance premiums will be paid from the superannuation account balance and not directly from your after-tax dollars (personal cashflow), making them much more affordable.
Insurance policies owned through grouped superannuation accounts (industry funds, employer groups and some ‘platforms’) may be available at a lower premium cost on the basis of the considerable amount of business able to be secured by the insurer through the particular source.
For trustees of a self-managed superannuation fund that has invested in direct real property (whether or not subject to borrowings external to the fund) there is an advantage to protect the assets of the fund for the contingency of the untimely death of one of the members – particularly of a member with a disproportionately high account balance.
…and the Con’s (costs/ disadvantages) –
The benefits, terms and conditions of the policies issued under ‘auto acceptance’ terms may not be adequate to satisfy all of the needs of your particular, personal circumstances.In some cases (like ‘direct insurance’ taken online or by phone in response to media advertising), these policies may have some unexpected exclusions when a claim is made.
Premiums paid for Life Insurance out of the superannuation account are withdrawn from invested funds and erode the accumulating compounding of the contributions and the investment returns.Additional (tax-deductible/ concessional) superannuation contributions calculated to offset this effect can be beneficial, but may be impeded by the contribution caps imposed under legislation.
Insurance policies held under employer group funds and/ or industry funds MAY expire after a term of non-receipt of contributions from the employer with whom the account was initiated.It is also the case in some such arrangements, that the premiums payable for the policy following leaving an employer group will be charged on a different, more costly basis.This increase can be significant, in some cases declaring you as a Smoker for premium calculation purposes.(This can be rectified in appropriate circumstances and you should seek advice on the matter.)
Trustees of SMSFs should carefully consider the ownership and beneficiary nominations on policies taken for the purpose of ‘balancing up’ account death benefit payouts so as to avoid unintentional taxation and superannuation benefit induced liquidity issues at what is already a difficult time.
There are taxation implications for having the death benefits from a superannuation account paid to beneficiaries who are outside the tax dependant class – and the consequences can be quite substantial.This situation can be avoided and advice is recommended in this regard.
The insurance cover provided under superannuation accounts are generally not able to be held beyond age 70 (whereas a policy outside of superannuation will most commonly be able to be held until age 99); and if at any time the superannuation account converts to pension mode the insurance policy will no longer be able to be held (unless particular alternative arrangements are made through another account).(Appropriate advice in each situation should overcome the impediment.)
…and beyond the Pro’s and Con’s, a helpful tip from the team at MoneySmart (the ASIC-sponsored website providing tips on various aspects of managing personal financial matters):
‘The key to deciding if you want insurance through your super fund is knowing how much cover you need and whether your super fund will offer the full amount. Being insured through super is generally a cost-effective and easy option. Just remember that if you change funds your insurance cover may stop.’
Trusted advice about insurance and superannuation –
Insurance and Superannuation are two elements common to the wealth management needs of most of us, particularly those having attained working age and beyond. As with many of the financial aspects of our lives, there is usually more than one answer to our questions about them. The one aspect that is relevant to all is that personal circumstances have a direct impact on what the best answer to your particular questions or concerns might be: and at Continuum Financial Planners Pty Ltd, we work to the mantra that – ‘we listen, we understand; and we have solutions’ to your personal and specific needs, that we deliver in personalised, professional wealth management advice. For more about our personal risk (life insurance) service offering, refer to our Risk Insurance Services Page on this website.
Originally published in November 2014, this post has occasionally been refreshed/ updated, most recently in January 2021.