Insurance Within Superannuation
Many people choose to hold a level of life insurance through their Superannuation Fund. It is important to understand what types of life insurance can be held in a super fund along with the benefits, consequences and limitations associated with this strategy.
Super funds typically have three types of insurance for members:
Life Insurance – Pays a benefit to your beneficiaries when you die, either as a lump sum or as an income stream.
Total and Permanent Disability (TPD) Cover – Pays you a benefit if you become seriously disabled and are unlikely to ever work again.
Income Protection Cover – Pays you an income stream for a specified period if you can’t work due to temporary disability or illness.
For insurance policies held in your own name, you pay the insurance premiums. When insurance policies are held within your superannuation fund, the insurance premiums are deducted from your super account.
Here are the advantages of getting life insurance through super:
- Cost – It is often cheaper as super funds purchase insurance policies in bulk and are able to offer competitive prices to members
- The Right Cover – You can get the cover you need for you and your family, even if your cash flow is tight
- Management – It is easy to manage because premiums are automatically deducted
- Choice – You can usually choose the amount you want to be covered for
Here are the disadvantages to holding life insurance through super:
- Limited cover – The types of insurance and level of cover, are limited
- Not portable – If you move to a different super fund or your employer’s super contributions stop, your cover may end without notice
- Tax – Tax may be payable on some benefits and there may be tax implications if your beneficiary is not a dependent
- Slower to pay – There can be delays in receiving benefits as the insurer pays the benefit to the fund first, who then distributes it to beneficiaries
- Who gets paid – If you do not make a binding death benefit nomination, or your fund does not offer binding nominations, the super trustee will decide who gets your benefits when you die, although your nomination will be taken into consideration
- Ends at around age 65 – Life insurance coverage through super ends when you reach a certain age, usually 65 or 70, policies outside of super may cover you for longer.
- Reduces superannuation balance – The cost of insurance premiums are deducted from your super balance, reducing the money available for your retirement
Powers Wealth can assist you with tailoring an insurance portfolio that will suit your needs. Please contact one of our advisers if you would like to review your current insurance needs.