Life insurance in and out of superannuation

Traditionally, Life insurance has been purchased either directly through an insurer, through a financial adviser (Advised Life Insurance), or as part of your superannuation.

Advantages and disadvantages to Life insurance in super

However, there are downsides to owning insurance in super. You run the risk of not having the right type or level of cover, or possibly being under-insured. Life insurance in your superannuation fund may not be tailored to your particular needs and circumstances. As premiums are paid from your superannuation savings, your superannuation balance will reduce by the premium paid each year.

Reasons for owning Life insurance outside Super

  • In some instances, the super fund premium rates may be higher than the premium under an individual policy that is owned directly by you, purchased through an insurer or financial adviser.
  • The level of cover available in a super fund is generally minimal as it is based on the overall number of members under the superannuation plan. It is often not enough to adequately cover your needs.
  • The ongoing insurance premiums over the longer term will impact on your end superannuation account balance and possibly leave you short when you retire.
  • You have less control when claiming, as the policy is held by the super fund and SIS (Superannuation Industry (Supervision) Act 1993) rules apply. It often takes longer for claims to be honoured and processed.
  • Benefits (usually as a result of a claim payment) paid to non-dependants may be taxed.
  • There are certain covers (such as Trauma cover) that cannot be included in your super. As Income Protection insurance is normally tax deductible when owned directly, many people choose not to include this type of cover in their super.

Reasons for owning Life insurance inside super

  • Many superannuation funds provide automatic cover which does not require underwriting when you or your employer set up your account. Therefore few questions are required to be answered to obtain the cover.
  • Premiums are often more competitive than with individual policies as you are covered by a group policy.
  • Premiums are deducted from your superannuation balance leaving you with no ongoing out-of-pocket expenses in the immediate term.

What are the tax considerations?

This table summarises the tax treatment of insurance premiums and benefit payments inside and outside of super.

Life

TPD

Income Protection

Inside Super

Premiums are tax-deductible, benefits are tax-free to dependants.* Benefits are taxed up to 31.5% to non-dependants.

Premiums may be tax-deductible. Benefits are taxed as part of super.

Premiums may be tax-deductible. Benefits are subject to income tax rates.

Outside Super (Directly owned)

Premiums not tax-deductible. Benefits are tax-free to any beneficiary.

Premiums not tax-deductible. Benefits are tax-free.

Premiums are tax-deductible. Benefits are taxable.

Note that the table is general information only.  It is based on current taxation laws which may change.  Before making decisions about taxation, speak with your accountant or adviser or visit the ATO website for further information.

How should you buy Life insurance?

There are generally four ways to purchase Life insurance:

1) Purchase Life insurance directly from a life insurer

2) Purchase Life insurance through a Third-party brand, such as Woolworths & Coles

3) Purchase Life insurance through your adviser or broker

4) Purchase Life insurance through your super fund.

Below are some of the advantages and disadvantages of each approach.

Life insurance directly

You can purchase Life insurance directly through an insurer, such as NobleOak, without a ‘middle man’.

In truth, there are very few Life insurers that let you buy directly.  Most Life insurers have long-established arrangements in place with third-party brands and advisers, which would create a conflict if they also sold policies directly.

Not so at NobleOak. Our intentions about selling directly to you and cutting out the middleman are understood by our partners. This means our premiums are lower and you get the same product features that you might otherwise expect through an adviser channel.

Why choose NobleOak?

NobleOak does not spend money on mass-market advertising and our products are fully underwritten, with no pre-existing condition exclusions. In most cases, our products are lower cost and more comprehensive than most direct Life insurances sold through third-party brands.

Through a third-party brand

Many direct Life insurance products are sold through third-party brands, which require margins to cover the high costs of mass-market advertising. Also, many such direct products have limited features, lower maximum amounts of cover available and sometimes contain broad ‘pre-existing condition’ exclusions. See below for more.

Advantages

  • As you are purchasing directly through the insurer, premiums will not incorporate a financial advice fee.
  • Direct Life insurance products are often simpler in their design, and therefore have a shorter underwriting time.
  • A medical examination or medical history is often not required up front, again making the underwriting process quicker at the start. This can result in further questions at claim time.

Disadvantages

  • Surprisingly, direct Life insurance is often more expensive than advised life insurance, as most insurers invest in television and other mass marketing costs that need to be recouped through the premium.
  • You don’t receive individual professional advice and it will be up to you to determine the level of cover you need.
  • Your policy may leave you underinsured or not covered when the time comes to make a claim due to built-in pre-existing condition clauses. These clauses exclude you from claiming if your illness or death was a result of a condition you had when taking the policy out.
  • The level of cover is often limited to $1m or $1.5m.

Through an adviser/broker

You can purchase Life insurance through a financial adviser or broker. This cover is generally more comprehensive than Life insurance available directly, and many people benefit from good quality financial advice.

You may not have to pay for this advice directly, but a typical adviser will be paid around 110% of your first year premium and around 10% of each year’s premium after that by the Life insurer, which is normally factored into your premiums. See the table below for more. NobleOak is a strong supporter proposed industry reforms to ban this upfront commission structure.

Why choose NobleOak?

NobleOak products are fully underwritten and just as comprehensive as advised products. An important difference is that NobleOak insurance doesn’t have built-in adviser commissions, which reduces our premiums.

Advantages of Advised Life insurance

  • You will receive financial advice about the type and level of cover you require.
  • It may end up being more cost-effective as you are only purchasing the insurance cover that you really need.
  • Your policy will be tailored specifically for you and your life stage.
  • Your policy is normally fully underwritten, meaning a more comprehensive questionnaire (application) and medical information is required upfront, providing more certainty at claim time.

Disadvantages of Advised Life insurance

  • High premiums may be payable as a financial advice fee or commission is often built into the premium.
  • Longer upfront application (and underwriting) time while medical and financial information is obtained.

Through your super fund

Many people have some Life and TPD insurance in their super fund through their employer. While this insurance is generally good value, automatic cover levels are generally not enough to meet your needs. There are also some important restrictions on claiming benefits. See the table below for more.

Generally only Life and TPD insurance, and sometimes basic Income Protection insurance, can be purchased in your super fund. Trauma insurance is not available within super.

Why choose NobleOak?

NobleOak products are also SMSF-compliant, so you can purchase our Life and TPD Insurance within an SMSF if required.

Advantages of Life insurance in superannuation

  • Many super funds provide automatic cover, which does not require underwriting when you or your employer set up your account.
  • Premiums are often more competitive than with individual policies as you are covered by a group policy.
  • Premiums are deducted from your super balance, leaving you with no ongoing out-of-pocket expenses.

Disadvantages of Life insurance in superannuation

  • In some instances, the group premium rates may be higher than the premium under an individual contract due to smaller member numbers under the plan.
  • The level of Life insurance available is generally minimal as it is based on the overall number of members under the plan and not tailored to individuals. It is often not enough.
  • The ongoing insurance premiums over the longer term will impact on your end super balance and possibly leave you with less than you expected when you retire.
  • You have less control when claiming as the policy is held by the super fund and ‘conditions of release’ apply. It often takes longer for claims to be honoured.