Getting the ‘super’ out of your super: Six questions answered about insurance and super
We answer some of the common questions about insurance and your super.
1. What types of insurance are available through your super?
- Super funds typically have three types of insurance cover:
- Life insurance - your beneficiaries receive a payment if you die
- Total and permanent disability (TPD) cover - you receive a benefit if you become seriously disabled and cannot work again in ANY occupation
- Income protection (IP) cover - you receive an income stream if you can't work due to temporary illness or disability
- Your super fund's product disclosure statement (PDS) or Insurance Booklet should contain the details of your specific insurer and what cover you have.
2. How can you pay for your insurance cover through super?
- Partial rollover – using your money saved in super to pay for your insurance premiums. The premium is effectively paid pre-tax from an existing super account, with the advantage being that it is not out of your cash flow.
- Employer contributions - if you run your own business, you can use your company to pay for your premiums as a superannuation contribution that is tax deductible.
- Salary sacrificing your insurance – you pay out of your salary to your super as a pre-tax contribution.
- Personal contributions – if you are self employed (with no employer support), you may be able to receive a tax deduction for your own contributions.
3. What types of insurance are not available?
- All insurances that are held through super have to conform to super legislation and cannot be accessed unless you meet a condition of release, such as dying, becoming permanently disabled or retiring (after preservation age). Therefore, you cannot be covered for the following:
- Trauma insurance - which pays you a one-off lump sum if you have a serious medical condition.
- Additional Income Protection benefits – such as bed confinement benefit, nursing care benefit, rehabilitation benefit; extras which are there to aid your recovery.
- Total and permanent disability ‘own occupation’ cover – this covers you if you are unable to do your OWN occupation. Within your super you can only have ‘any occupation’ cover (see question 5).
4. What are the benefits of insuring through your super?
- Tax advantages – premiums are paid from your super account, rather than your after-tax income.
- Cash flow - if you use your existing super to pay your premiums, this can help to make the cover affordable if cash flow is tight.
- Cost - some superfunds use group insurance policies which may be cheaper.
- Possibly avoid medical check - some funds have automatic acceptance levels which may be of benefit if you’re a smoker or have health issues.
5. Should I have extra insurance cover which is not through my super?
- The recent Rice Warner’s Underinsurance in Australia Report showed that the insurance gap in Australian stands at 1.811 trillion dollars, covering just 60% of basic life cover needs. For most Australians, insurance cover in your super fund is not enough to financially protect your family should you get sick or die.
- It is most important to have cover that is appropriate for your situation. Having cover under super doesn’t improve the cover, but rather can allow premiums to be tax deductible.
- If you are already contributing the maximum concessional contributions to super, there is no additional tax advantage in using some of those contributions to fund cover.
- The Total and permanent disability (TPD) cover under your super will be ‘any occupation’ TPD which means you are assessed against your ability to do any occupation for which you are reasonably suited by means of education, training or experience, even if these occupation pay a lot less than your own occupation.
- Trauma cover can’t be held in super. Hence it will need to be self owned in most circumstances.
6. What issues should you be aware of when using your super to pay for insurance?
- If you are paying your premiums using your super, you need to remember it is real money taken from your retirement savings.
- There are limitations to types of insurance you can have.
- You need to make sure you have the right nominated beneficiaries. Money paid out through super is not part of your estate and controlled by your will.
- If you change jobs or if you amalgamate your super you may lose your insurance benefits.
- There can be delays in claim payments as claims must first be assessed and admitted by the insurer, and then be assessed and admitted by the trustee. If there is no valid binding nomination, the trustees must also decide who will receive the benefit.
*A version of this article was written by AFRM for the ipac September client e-newsletter
Please note, this information has been prepared by Australian Financial Risk Management Pty Ltd (AFRM) ABN 21 001 696 868. AFRM hold an Australian Financial Services License (AFSL) 237186. The information is for general purposes only and has been prepared without taking account of your objectives, financial situation or needs. AFRM recommends that you seek professional advice before acting on any information contained herein.