Life insurance through your superannuation fund is a convenient way to secure financial protection for your family. Your super fund often includes default insurance, which may provide death cover, income protection or permanent disability insurance without the hassle of applying for stand-alone policies.
By structuring your insurance within your superannuation fund, your insurance premiums are funded from your super balance which may be beneficial, particularly for those struggling with personal cashflow obligations.
Think about the peace of mind that comes with knowing your loved ones will receive a lump sum if something unexpected happens. Understanding these considerations ensures you make informed decisions and safeguard your family’s financial future in a cost-effective way.
What is Life Insurance Through Super?
Life insurance in super is a financial product offered by most super funds, providing essential coverage for super fund members. The super life insurance options typically include three main types:
Life Cover (or death cover), which pays a lump sum to beneficiaries upon death.
Total and Permanent Disability (TPD) insurance cover, offering a lump sum if a member becomes permanently disabled.
Income Protection, which provides an income stream if the member cannot work due to illness or temporary disability.
Premiums for these policies are automatically deducted from a member’s super balance. However, it’s essential to review the product disclosure statement to understand coverage limits and potential impact on retirement savings.
How Does Life Insurance Through Super Work?
Life insurance through Australian superannuation operates by integrating insurance cover within super funds, allowing members to manage premiums and coverage efficiently.
Premiums are typically funded by superannuation contributions, with amounts automatically deducted from the super balance. This arrangement means that members do not need to allocate funds from their take-home pay, making it a budget-friendly option.
However, it’s essential to ensure that sufficient funds are available in the super account to cover these premiums, as insufficient balances can lead to loss of coverage.
Coverage may include life insurance cover (death cover), total and permanent disability (TPD) insurance, and sometimes income protection.
How much cover you get can vary by super fund and may be set at a default level, which members can often adjust based on their needs.
Eligibility for life insurance in super typically requires members to be at least 25 years old or have a minimum super balance, ensuring that most super fund members can access at
a minimum a default benefit.
Benefits of Life Insurance Through Super Funds
Life insurance in super offers several compelling benefits that make it an attractive option for many individuals.
Cost-Effective
One of the primary advantages is that insurance premiums are deducted from your super account rather than your personal cash flow, making it a more budget-friendly choice.
Accessibility
This arrangement also enhances accessibility to an automatic level of life insurance cover, particularly for those who may struggle to obtain coverage outside of a superannuation fund. Individuals who have pre-existing health conditions or occupations which are considered high-risk may have difficulty obtaining a stand-alone insurance policies. By taking advantage of your super fund’s minimum/default level of cover, you are able to secure at least a minimum level of insurance cover for your family’s protection.
Tax Benefits
Additionally, there are some tax benefits associated with holding life insurance within super, as premiums are paid from your super balance, which is taxed at 15%.
Automatic Coverage
Most super funds offer automatic coverage or default insurance upon joining, ensuring that members are automatically covered for a predetermined sum insured (usually depending on age) without needing to navigate complex insurance options. If your insurance needs are greater than the default amount, you may apply for additional cover, but you will need to undergo assessment (typically including medical underwriting) for the amount exceeding your default amount.
However, there are super funds where new members with balances under $6,000 are not automatically covered. The government recently introduced regulations where members with balances under $6,000 are not automatically covered (to protect low account balance funds). However, you can opt-in to receive insurance if you wish by contacting your super fund.
Drawbacks and Considerations of Insurance Through Super Fund
Life insurance through superannuation can present several drawbacks that individuals should carefully consider.
Coverage Limits is one significant concern as default policies offered within super funds may provide lower insurance cover compared to those purchased independently. This limitation can leave individuals underinsured in critical situations.
Super Balance is Impacted when insurance premiums are deducted from the super account, which can ultimately affect retirement savings. As premiums are paid, the available funds for retirement diminish, which can lead to insufficient savings for the future.
Terms of Insurance Policies in super funds come with restrictions and exclusions that may not be present in standard insurance policies. Further to this, terms of the underlying insurance policy can potentially be changed by the superannuation trustee over time.
Claims Process can be complicated by the terms of insurance in super, making it more challenging for beneficiaries to make claims when needed.
Comparing Life Insurance Through Super vs. Outside Super
When it comes to obtaining life insurance, individuals have the option to purchase coverage through their superannuation funds or directly from an insurer outside of super. Here are the key differences to consider:
Premium Payments
Premiums paid through super are automatically deducted from your account balance, preserving your disposable income.
Premiums paid outside super are made from your take-home pay, which may have a greater impact on your personal finances.
Coverage Flexibility
Insurance policies outside super typically offer more customisation options and higher levels of coverage compared to default insurance provided through super funds.
Increasing cover above the default level in super usually requires additional underwriting and medical checks.
Tax Implications
Premiums for life and TPD insurance paid through super are generally not tax-deductible, but contributions to your super fund are taxed at a lower rate of 15%.
Premiums for income protection insurance paid outside super are typically tax-deductible.
Benefits paid from super may be subject to taxation, while death benefits paid directly from an insurer are usually tax-free.
Claims Process
The claims process for insurance through super is managed by the fund’s trustee, who will assess and distribute the benefit.
Claiming directly with an insurer may offer a more streamlined process, as you have a direct relationship with the provider.
Conclusion
Superannuation life insurance provides financial protection, including death, TPD, and may include income protection. Premiums are deducted from the super balance, making it cost-effective and potentially tax-efficient. However, it has limitations like lower coverage levels and impact on retirement savings.
The decision to obtain life insurance through super fund or outside super depends on your personal circumstances, financial situation and goals, and insurance needs.
Check your super fund’s annual statement to review your current super fund’s insurance offerings and consider seeking professional advice. A financial adviser can provide tailored financial product advice, ensuring that your coverage aligns with your specific needs and goals, ultimately enhancing your financial security.
Get Superwise About Your Superannuation with Central Coast Financial Planning Group
Superannuation is vital to your financial future in retirement as an Australian. Whatever stage you are at right now in your career, learning about how you can make the most of your long-term retirement savings plan is always good practice.
At Central Coast Financial Planning Group, we can provide the specialist superannuation advice, expert knowledge and guidance you need to help you make the right financial decisions for your superannuation strategy so you can confidently look forward to your future.
Call us or book online to secure your first appointment with us today and get started!
References:
https://www.tal.com.au/slice-of-life-blog/life-insurance-through-super
https://treasury.gov.au/sites/default/files/2019-03/R2009-001_Final_Report_Part_2_Chapter_5.pdf
https://moneysmart.gov.au/how-life-insurance-works/insurance-through-super
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