Hold Life Insurance Inside or Outside of Super?

When it comes to safeguarding your financial future, personal insurance plays a crucial role. It provides a safety net for you and your loved ones in the face of life’s uncertainties. One decision that individuals often grapple with is whether to hold life insurance inside or outside their super fund. In this article, we will explore the advantages and disadvantages of each approach and address the question: Is it wise to pay life insurance via your superannuation?

Inside the Superannuation Fund: Is It Wise to Pay Life Insurance Via Your Superannuation?

Many Australians opt to pay for life insurance through their superannuation funds. This approach has its advantages, making it a popular choice.

Advantages:

1. Cost-Efficiency: One of the primary reasons individuals choose this option is cost savings. Superannuation funds often have access to group insurance policies, which are generally more cost-effective than purchasing an individual policy. This can result in lower premiums, making insurance more affordable.

2. Tax Benefits: Contributions made to your superannuation fund are typically tax at the lower rate of 15% compared to your marginal tax rate. This can reduce the cost of non-deductible insurance (Death or TPD) compared to paying with after tax take-home pay.

3. Cash Flow Management: Paying insurance premiums within your superannuation fund can help with cash flow management. Instead of paying premiums directly from your take-home pay, they are deducted from your super balance, meaning you dont have to pay premiums from your disposable income.

4. Automatic Acceptance: Group insurance policies often come with automatic acceptance levels, which means you may not need to undergo a medical examination or answer detailed health questions to secure coverage. This can be advantageous for individuals with pre-existing health conditions.

AIA offers group insurance to SMSF members via SMSFInsurance.com.au so that you can access premium rates generally not available to individuals out side of a group super scheme.

However, there can be disadvantages to holding insurance within your superannuation fund.

Disadvantages:

1. Less Customisation: Group insurance policies may not provide the same level of customisation as individual policies. This can mean certain product features available in more expensive retail policies may not be available.

2. Tax on Benefits: While there are tax benefits to contributing to your superannuation fund, it’s important to note that benefits paid from the fund may be subject to taxation. This can reduce the payout your beneficiaries receive in the event of a claim. An example of this is, a death benefit paid to non-dependent beneficiaries may be taxable (dependent beneficiaries would usually receive the benefit tax free).

3. Access Restrictions: Access to insurance benefits are generally subject to the same conditions of release as other superannuation assets. For example, you may only be able to access the benefits once you reach a retirement age or meet specific criteria such as total and permanent disability. This is because the policy benefits are paid to the fund and become part of the funds assets.

Outside the Superannuation Fund: Individual Insurance Policies

On the other hand, holding personal insurance policies outside your superannuation fund provides a different set of advantages and disadvantages.

Advantages:

1. Customisation: Individual insurance policies can be tailored to your specific needs. You have more control over the type and level of coverage, ensuring it aligns with your financial goals.

2. Tax-Free Benefits: Benefits paid from individual insurance policies are typically tax-free. This means that your beneficiaries receive the full benefit amount without deductions.

3. Portability: Individual insurance policies are not tied to your superannuation fund, making them more portable. You can maintain coverage even if you switch superannuation fund.

4. Immediate Access: With individual policies, you have immediate access to the insurance benefits when needed. There are no restrictions tied to your superannuation preservation age. This point is particularly important and why smsfinsurance.com.au offered a linked income protection policy held outside super – learn about this here.

Disadvantages:

1. Higher Premiums: Individual insurance policies (often called retail policies) are generally more expensive compared to “group” insurance policies within superannuation funds (such as the group life insurance policy offered via smsfinsurance.com.au for SMSF members). This can be a drawback for those looking to reduce costs.

2. Reduced Tax Benefits: Contributions to individual insurance policies are typically not tax-deductible (Life and TPD cover), potentially resulting in higher upfront costs. Income protection premiums however are typically tax deductible so this disadvantage would not apply to IP cover.

In conclusion, the decision to hold personal insurance inside or outside your superannuation fund depends on your individual circumstances and financial goals. Each approach comes with its own set of advantages and disadvantages. If you value cost-efficiency and automatic acceptance, paying for insurance via your superannuation fund might be a wise choice. However, if customisation and portability are important to you, an individual insurance policy may be the better option.

Ultimately, it’s essential to carefully assess your insurance needs, consider your financial situation, and consult insurance broker to make an informed decision that aligns with your long-term objectives.