Paying for your insurance, should you use your superfund?
Most industry super funds offer members a basic level of personal insurance cover. Holding your insurance within super, rather than having stand alone policies (policies you pay for personally), can have its benefits. In a stand-alone policy you would typically pay premiums from after-tax earnings. Within superannuation they can be paid from your pre-tax employer or salary sacrifice contributions, which can be good for your cashflow.
Other advantages include the possibility of lower premium rates in large funds due to group rates for members, so you may be able to elect for a higher sum insured than you would have outside super, for the same price, or maintain the same sum insured but at a reduced cost. Many funds also have automatic acceptance for basic levels of cover, with no need for medical questionnaires or examinations.
But before going ahead you need to consider the flip side. With a stand-alone life policy, death claims are usually paid relatively quickly once a death certificate is provided. Within super, however, the trustee of the fund can decide how, and to whom, a benefit is paid so the process can take longer. This is a point worth considering as the mortgage and other bills can only be put on hold for so long.
While proceeds of stand-alone Life and TPD (Total and Permanent Disablement) policies are generally paid out tax-free to beneficiaries, insurance benefits within a super fund become part of the fund’s account balance and recipients may be liable for tax depending on how, and to whom, the benefits are paid. It’s worth seeing how paying a higher premium would stack up.
Accepting a fund’s default offering can be risky as it’s easy to underestimate how much insurance cover you will need. The default level of cover may be only a basic amount (eg. $100,000 or $200,000) or a fixed multiple of salary (eg. 3 x salary). In reality you may need three or four times that amount to protect your family financially.
With income protection, often policies within superannuation funds have a 90 day waiting period and are only paid for up to 2 years. Therefore if you have limited savings waiting 90 days for your first payment may be too long or a long term sickness may go beyond the 2 years which means that you won’t be covered.
Finally, because you’re using a portion of your superannuation contributions to pay the insurance premiums, less money is available to invest in your fund – so it’s worth calculating what this may mean for your retirement savings.
Ultimately, the best way to structure your personal insurance will depend on your personal circumstances and the level of cover you require, so it’s a good idea to seek advice. To find our more please do not hesitate to contact us .