Life Insurance and Super: 7 things you need to know
Do you have or are you considering Life Insurance through your superannuation fund?
Life Insurance purchased through super can be a good way to ensure you at least have some level of cover, which is always better than none at all. And in most cases, you should be able to secure cover at a relatively low cost – without needing to do a health check.
With the banking Royal Commission turning its focus to the Life Insurance industry this week, we have heard details about some concerning practices involving a number of super fund managers.
Following are seven important issues which we feel you should be aware of in having your Life Insurance through super:
1. It reduces your fund balance
Although you do not need to pay the premiums for Life Insurance out of your own pocket, they are deducted from your super account balance. This means you could end up with significantly less super benefits than you anticipated or had planned for in retirement.
2. Not transferrable between funds
Prior to the 2005 introduction of Super Choice, which enables workers to nominate their own super funds, many employees ended up with several funds as they shifted between jobs. If this has happened to you, its important to note that if you roll over all your super account balances into one fund, any Life Insurance held within the funds you are exiting cannot be transferred to the new fund. As ASIC’s MoneySmart website states, the same principal applies if you choose to change from one fund to another at any time.
3. There may be an expiry date
If your superannuation ends at retirement age, any Life Insurance cover may too. This could be something you need to consider.
4. The cover may be inadequate
The insurances offered by super funds are usually default coverages and are therefore limited. The legislative system has some restrictions on the type of cover that can be offered within superannuation.
If you feel your cover within your super fund is too low, you may be able to increase it through your fund for a higher premium, or you could top it up by securing another policy outside of super. The latter may be a better option as it provides more choice and flexibility for you.
5. You may be able to get a package deal
Some funds allow you to obtain a combined policy, one that includes Life Insurance, TPD, and Income Protection cover. Again, these types of cover are likely to be limited and may not adequately meet your needs.
6. The premiums are not tax deductible
If you have a combined Life Insurance and Income Protection policy outside of super, the cost of the Income Protection component can usually be claimed as a tax deduction when doing your tax return. However, if you have your insurance inside super as the premiums are not paid by you but by the fund, you cannot claim these premium payments as a Tax Deduction as these haven’t been paid directly by you.
NB – There may be exceptions to this when it comes to self-managed super funds (SMSFs) – refer to point 7 below.
7. Life Insurance through an SMSF may be deductible
Life Insurance purchased through an SMSF may be partially or fully tax deductible, but it’s important to be aware that the rules are very strict and complex. For example, Income Protection premiums may be fully deductible if they are paid for total disablement under an ‘Any’ occupation definition, but only partially deductible under an ‘Own’ occupation definition.
Life Insurance premiums may also be fully or partially deductible, but the policy must be in the fund’s name. Any benefits paid will become financial assets of the fund, until a condition of release of the relevant fund member is satisfied.
According to the ATO, SMSFs are required by law to consider whether to secure Life Insurance for each fund member.
Is it time to review your cover?
Please note that the information we provide is not advice but general information only. It does not take into account your objectives, financial situation or needs. NobleOak is not permitted to provide taxation or accounting advice. Consult your taxation adviser or accountant who can assist based on your personal circumstances. Please refer to our PDS for more information on our product terms and conditions.