Introduction
Deciding if life insurance should sit inside or outside your super fund is a choice that lots of Aussies grapple with. Most super funds toss in a bit of default insurance, and knowing what this means compared to having your own standalone policy is key. It helps make sure your money safety net matches what you need. Imagine having the peace of mind knowing exactly where your insurance stands. It’s like choosing between the security of a snug blanket or the freedom of a cool breeze. Tune in to uncover the best fit for your financial safety plan.
This guide explores the key differences between holding insurance inside versus outside superannuation. We will compare factors such as costs, the level of cover available, tax implications, and flexibility to help you assess which insurance option best suits your individual insurance needs and life stage.
Understanding the Basics: Insurance Inside vs Outside Super
Default Insurance Cover Inside Your Superannuation Fund
Most superannuation funds offer a basic level of default insurance cover to members when they join. This often includes:
- Life cover (also known as death cover)
- Total and Permanent Disability (TPD) insurance
For many Australians, this insurance inside super is the primary or only life insurance cover they hold.
A key feature of default insurance inside super is automatic acceptance. This means eligible members typically receive cover without needing detailed health checks or medical examinations. This can be particularly beneficial for individuals with pre-existing health conditions or those in higher-risk occupations who might find it harder or more expensive to get insurance cover elsewhere.
However, this default insurance cover is generally basic and may not be tailored to your specific circumstances or needs. The level of cover might be relatively low compared to what you could obtain through a standalone policy. Additionally, premiums for this insurance cover are conveniently deducted directly from your super balance, which will reduce your retirement savings over time.
Standalone Insurance Cover Outside Superannuation
Standalone insurance cover refers to policies purchased directly from a life insurer, separate from your superannuation fund. These insurance policies are held outside super and offer a different approach to managing your insurance needs. Typically, premiums for this type of insurance cover are paid from your personal bank account using after-tax money.
A significant aspect of standalone insurance cover outside super is the potential for greater customisation and flexibility. You can often:
- Tailor the level of cover and policy features to more closely match your individual requirements and financial situation
- Obtain potentially higher amounts of cover compared to the often-capped default levels available within a superannuation fund
Obtaining standalone insurance cover usually involves an individual assessment by the insurer, considering factors such as:
- Your age
- Health
- Lifestyle
- Occupation
While this underwriting process may mean higher premiums for some individuals compared to group rates within super, it also allows the insurance policy to be specifically designed for your circumstances. Furthermore, these policies are independent of your superannuation arrangements, meaning changes to your super fund or employment won’t automatically affect your insurance cover.
Comparing Costs and Tax Implications
Premium Costs: Insurance Through Super
When you hold insurance through your superannuation fund, the premiums are typically deducted directly from your super balance. This can be convenient for managing cash flow, as you don’t need to make payments from your personal bank account.
Additionally, super funds often purchase insurance policies in bulk for their members, which can lead to group discounts. These group rates may result in lower insurance premiums compared to buying an individual policy outside super. However, it’s important to remember that these premiums reduce your super balance, potentially impacting your overall retirement savings due to the loss of investment earnings on that money over time.
Premium Costs: Insurance Outside Super
For insurance cover held outside superannuation, premiums are paid directly from your personal bank account using after-tax money. These premiums may sometimes be higher than those available through a super fund, as the policy is assessed on an individual basis considering factors like your age, health, and lifestyle.
Standalone policies outside super often offer different premium structures:
- Stepped premiums: These generally start lower but increase each year as you get older.
- Level premiums: These remain consistent over time, usually until age 65 or 70, potentially offering long-term savings if you plan to keep the policy for many years.
Tax Treatment Considerations
Paying insurance premiums through your superannuation can offer tax advantages. Premiums are often paid from pre-tax contributions (like employer contributions or salary sacrifice), meaning they are effectively paid with money taxed at the concessional superannuation rate of 15%, which is lower than the marginal tax rate for most people.
In contrast, premiums for life and TPD insurance outside super are generally paid with after-tax dollars and are not tax-deductible. An exception is Income Protection insurance premiums paid outside super, which are often tax-deductible.
Furthermore, it is crucial to consider the tax implications of benefit payouts. Death benefits paid from superannuation to beneficiaries who are not considered tax dependants (such as adult children) may be subject to tax. Similarly, TPD benefits paid from a super fund may also have a taxable component.
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Level and Types of Insurance Cover Available
Amount of Cover: Default vs Tailored Needs
The level of insurance cover provided automatically through your superannuation fund, known as default cover, is often basic. This default amount might be based on your age or a set level, and it may not be sufficient for your specific financial circumstances or insurance needs.
Many super funds offer default Life (death) and TPD cover, but the amount might be relatively low compared to what you could obtain outside super.
Furthermore, the amount of default insurance inside super can sometimes decrease as you get older, potentially reducing your protection when your risk might be higher. Additionally, there can be caps on the maximum amount of cover available within a super fund.
In contrast, policies taken out directly with an insurer outside superannuation generally allow for greater flexibility. This flexibility enables you to apply for higher levels of cover tailored specifically to your personal situation, debts, and family requirements.
Types of Insurance: What’s Included and Excluded?
Superannuation funds typically offer three main types of insurance cover to their members. These usually include:
- Life insurance: Also known as death cover, this pays a benefit if you pass away or are diagnosed with a terminal illness.
- Total and Permanent Disability (TPD) insurance: This provides a payout if you become totally and permanently disabled and are unlikely to work again, according to the policy’s definition.
- Income Protection (IP) insurance: Also called salary continuance insurance, this provides regular payments for a specified period if you cannot work due to temporary illness or injury.
However, certain types of insurance cover are generally not available through superannuation, such as:
- Trauma insurance: Pays a lump sum upon diagnosis of specific critical illnesses like cancer or heart attack.
- Own Occupation TPD insurance: Assesses your inability to work in your specific job.
While some older policies established before July 2014 might still exist, more comprehensive ‘Own Occupation’ TPD insurance is generally only available through policies held outside superannuation.
Additionally, the type of TPD insurance available inside super is usually ‘Any Occupation’ TPD, which offers a broader definition but less specificity compared to ‘Own Occupation’ TPD insurance available externally.
Application, Claims, and Beneficiaries
Getting Covered: Medical Checks and Underwriting
Obtaining default insurance cover inside your superannuation fund is often straightforward due to automatic acceptance. Many super funds provide this basic level of cover without requiring detailed health checks or medical examinations. This can be particularly advantageous for:
- Individuals with pre-existing health conditions
- Those in higher-risk occupations who might otherwise find cover difficult or expensive to secure
However, if you wish to increase your insurance cover above the default level within your super fund, you may need to undergo medical underwriting. This process typically involves answering health questions or potentially completing a medical examination.
Similarly, applying for standalone insurance policies outside superannuation usually involves individual assessment by the insurer, considering factors like your age, health, lifestyle, and occupation. While this underwriting process allows for tailored cover, it may mean higher premiums or exclusions for certain individuals compared to the automatic acceptance often found with default insurance inside super.
The Claims Payout Process
Receiving a payout from insurance held inside your superannuation fund can sometimes involve a longer process compared to standalone policies. The process works in two steps:
- When a claim is approved, the insurer first pays the benefit amount to the superannuation fund trustee
- The trustee must then determine if a condition of release under superannuation law has been met before paying the funds to the member or their beneficiaries
This two-step process can potentially lead to delays in accessing the funds. In contrast, claims on insurance policies held outside superannuation are typically paid directly by the insurer to the policyholder or their nominated beneficiaries.
This direct payment pathway can often result in a faster claim payout. It is worth noting, however, that claim processing times can vary between insurers and specific circumstances, as highlighted by ASIC’s life insurance claims comparison tool.
Nominating Beneficiaries: Restrictions vs Flexibility
Nominating who receives the payout upon your death differs significantly between insurance inside and outside superannuation. When holding insurance inside super, your options for nominating beneficiaries are generally restricted by superannuation law. You can typically only nominate:
- Your legal personal representative (your Estate)
- Your dependants, which include your spouse, children, financial dependants, or individuals in an interdependency relationship
Even with a nomination, the super fund trustee often retains the final discretion regarding the payout, especially if the nomination is non-binding or invalid. The trustee must follow superannuation law and the fund’s governing rules when distributing the death benefit.
Conversely, holding insurance cover outside superannuation provides greater flexibility in nominating beneficiaries. You can generally nominate any person, company, or even a charity to receive the insurance proceeds directly, offering more control over who benefits from the policy.
Policy Flexibility, Ownership, and Portability
Customisation and Policy Terms
Insurance policies held outside superannuation generally offer greater flexibility for customisation compared to those within a super fund. Standalone policies allow you to tailor the level of cover and specific features more closely to your individual insurance needs and financial circumstances.
This contrasts with group insurance policies inside super, which may offer less scope for personalisation due to being negotiated for a large membership base.
The terms and conditions of insurance cover inside a superannuation fund can sometimes change. This is because the super fund trustee owns the policy and may renegotiate terms with the insurer, which can affect existing members.
Conversely, standalone policies held outside super offer several advantages:
- The terms are generally fixed and guaranteed renewable as long as you continue to pay the insurance premiums
- They may offer different premium structures, such as level premiums that remain consistent over time
- These premium structures are not typically available within super funds
Portability: Changing Jobs or Super Funds
Holding insurance cover inside your superannuation fund can present challenges regarding portability. Your insurance cover may cease under certain circumstances, such as:
- Changing your super fund, perhaps due to a new job
- Stopping contributions to your super account
- Your super account becoming inactive, generally meaning no contributions received for 16 continuous months
- Your super balance falling below a certain level required by the fund
This lack of portability means you could unintentionally lose your insurance cover when your employment or superannuation arrangements change.
In contrast, standalone insurance policies held outside super are generally portable. These policies are not tied to a specific employer or superannuation fund. Consequently, changing jobs or switching super funds typically does not affect your insurance cover, provided you continue to pay the premiums directly to the insurer. This offers greater continuity and certainty for your insurance protection.
Conclusion
Deciding whether to hold your life insurance inside or outside your superannuation involves weighing up differences in cost, the level and types of insurance cover available, tax implications, the claims process, and overall flexibility. Insurance inside super often offers convenience and potentially lower premiums deducted from your super balance, while standalone policies outside super provide greater customisation, potentially higher cover amounts, and more control over beneficiaries, albeit often paid with after-tax money.
Understanding these trade-offs is crucial, as the optimal choice depends entirely on your unique financial situation, insurance needs, and life stage. To navigate this complexity and ensure your insurance strategy aligns perfectly with your personal circumstances, contact Money Path in Adelaide today for trusted expertise and tailored financial advice on superannuation and insurance options.
