There are several questions that must be answered before figuring out whether to hold personal insurance inside or outside super. Getting it right can be beneficial in many ways.
For effective personal insurance cover there is much to consider. What types and levels of cover do you require? Are you paying your premiums tax-effectively? How and when do your beneficiaries access your insurance proceeds after death, or how do you access proceeds in the event of a serious illness or injury? Can proceeds be accessed early if necessary? For you, or for anybody you know that is considering a solid insurance strategy, these are vital considerations.
A good question to begin with when fine-tuning your insurance strategy is whether to hold insurance inside or outside of super.
Getting this decision right involves coming up with the answers to many of the other questions.
Types of insurance
Many superannuation funds offer three basic forms of personal insurance. These are life, total & permanent disability (TPD) and income protection. Other types of insurance such as trauma cover generally cannot be held within super.
Seek insurance outside a super fund and you can mix and match types of cover. Policies can sometimes be packaged up with one provider, to lower premiums, which could otherwise be more expensive outside the super environment.
Levels of insurance
Automatic, and typically low, levels of life or life and TPD cover within a super fund can be fine for a young person starting their first job. But for somebody at another life stage ‑ with a partner, children and a mortgage, for instance - it can be a different story.
Insurers providing cover within super can put caps on their levels of cover. It is important to make sure you ask your fund about these limits and levels. Outside super the levels of cover can be more flexible, but this will also depend on your age and health.
Medical check-ups
Fund members automatically offered insurance often do not need to undergo a medical check-up. The funds instead spread risk amongst their many members.
At the same time, while it can be possible to find cheaper premiums outside of the super environment, considerations such as age, health, lifestyle and job-risk matter. As insurance is offered on a case-by-case basis, individuals are treated as just that - individuals. For some this can mean higher premiums, but it can also lead to greater flexibility and customisation.
Policy customisation
Thanks to superannuation laws, which restrict policy definitions and the level of customisation that can occur to a policy, insurance policies within a super fund can be less flexible.
Automatic covers usually require little, if any, consultation with the fund member. This may or may not suit a member’s needs.
Policies outside super begin with a customisation process. This can be important for those that require specific levels of cover, and for policy holders that want to be sure of what is covered and of how, when and to whom payments are made after an insurable event.
Tax effectiveness and paying premiums
For the majority of fund members, it is difficult to beat the tax effectiveness of personal insurance paid within a super fund (although life insurance benefits paid from super can be subject to tax if paid to a non‑dependant for tax purposes such as an adult child). Premiums are often paid out of compulsory super payments made by your employer or voluntary concessional contributions such as salary sacrifice. In addition, your super fund can generally claim a tax deduction for premiums it pays.
This means that unless you’re a high-income earner or depositing more than your annual concessional amount, the premiums are generally paid from income that has not been taxed.
At the same time these premiums, while not being paid from your own pocket, are eating away at your final super balance. So if you’d prefer to reduce such outgoings then seeking insurance outside your fund could be the answer.
Benefits of both
Conclusion
The question of insuring within or outside a super fund, or a mix of both, is one with no right or wrong answer. The solution lies with the needs of each individual. Once you have settled on the answer, it is not a set-and-forget decision. With each life stage and major event – marriage, childbirth, mortgage, pay rise etc. – comes new and different responsibilities. So be sure to check in with your insurance every so often.