I've heard that some insurance can be paid for by your super. I'm 45 and have just got married and am thinking about life and injury insurance to cover my new family. I have about $100K in super. How much would it cost and will my super balance be affected much?
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Hi Brad, that’s a great question, the short answer is yes, Life Insurance, Total Permanent Disability and Income Protection Insurance can all be held inside a superannuation fund. The only insurance that can’t be held inside superannuation is Trauma (Critical Illness) insurance.
Insurance in super can be held in two ways. Under what is commonly called a “Group Insurance” arrangement, as it is known inside the fund (this is the most common type of cover) where there is one policy owned by the super fund. All the members of the fund are grouped together, and premiums are paid from your fund balance. Group Insurance can often be a cheaper alternative but there are pros and cons with this type of cover. Group cover is nowhere near as far-reaching as a retail or “Super linked” stand-alone life insurance policy. Often, automatically calculated cover is calculated on a unitised formula based on your income or age to determine the cover amount which may not suit your specific circumstances, i.e. you may be given $100,000 or $200,000 when in reality you may need closer to $500,000 or $1 million-plus to protect your family.
Alternatively, it can be held under a “Retail or “Super linked” arrangement. This is where the Policy is owned via an external Insurance Superannuation fund (which just exists for the purposes of owning the insurance and you are the only insured person). In this arrangement the cover is determined by an adviser providing a comprehensive analysis of your specific needs to determine the sums insured to ensure that you are adequately covered and a suitable Policy is recommended. Premiums are then paid via an “Annual Rollover” from your fund to the fund where the insurance is held, or, in some cases, people may have a combination of both types.
However, determining which structure is best suited for you specifically is a more complex question. There are pros and cons to both options and the decision will depend on consideration of a number of different factors that are specific to your circumstances. Issues that need to be considered include your level of income, affordability of premiums, whether or not your current super fund allows partial rollovers, the tax implications of each option and your beneficiary requirements to name a few.
Holding insurance via superannuation can often be attractive in terms of potentially lower premium costs, Taxation and cash flow advantages and estate planning options when compared with holding insurance outside of super.
Your question regarding whether or not your balance would be affected is directly related to the cost of premiums and types of insurance held in your fund, but the short answer is yes, almost definitely. Holding insurance in Super (Group or retail) will impact the funds available for retirement in the long term if other funds are not contributed to your fund. However, there are strategies that can be employed to offset the cost of premiums such as Salary Sacrifice or other types of contributions which a qualified adviser can discuss with you to see if they are suitable for your situation.
In relation to the cost of premiums, this is a difficult question to answer as polices are costed based on your specific age, sex, occupation and current and past health status, so providing a definitive cost is not possible.
Generally some of the advantages of holding insurance in superannuation are as follows:
- If insurance is “Retail or Super Linked” a level Premium can save money over the long term and provide consistency of premium cost,
- Premiums are more manageable due to premiums being deducted from your balance rather than your personal cash flow,
- Less chance of polices lapsing if you lose your job or cash flow becomes tight meaning you protect yourself for longer
- There can be tax benefits to holding insurance in super depending on the type of cover held, how it is structured and whether or not you implement strategies such as salary sacrificing.
Some of the disadvantages of holding insurance in super can include:
- Under group cover arrangements, if unitised or automatic cover is given sums insured may not be sufficient for your needs
- Obviously if you do not “top up” your super fund balance with some form of contributions, your balance will reduce by the premium amount each year
- An extra layer of complexity and potentially time is introduced with the trustee of the super fund owning the policy and paying the benefit to the nominated beneficiary
- Taxation of lump sums can be problematic if benefits are not paid to financial dependants as determined by the SIS Legislation.
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