Whether it is better to hold insurance inside or outside superannuation depends on you, your financial situation and motivations.
To help with making this decision, the following table provides a quick overview of the main advantages and disadvantages for insurance inside superannuation.
| ADVANTAGES | DISADVANTAGES |
|---|---|
| Reduce pressure on cashflow: • Premiums can be paid from accumulated savings or employer contributions instead of disposable income | Reduced claim benefits: • Only benefits that meet the sole purpose test can be paid – may lose some features otherwise available outside super |
| Easier access: • No (or minimal) underwriting for group insurance arrangements (up to specified limits) | Tax on claims: • Beneficiaries could pay tax up to 30% plus Medicare and other levies on claims received |
| Lower effective cost of premiums: • Salary sacrifice or deductible contributions may be used to pay premiums from pre-tax earnings | Delays in receiving claims: • Once a claim has been approved and is paid to the super fund trustee, the trustee needs to then follow procedures to pay the super benefit • The timeframe can be lengthy if disputes arise (eg up to 2 years if resolved through super complaints tribunal) |
| Claim strategies: • May have choice and flexibility to receive benefits as lump sum or tax-effective income stream | May need more than one policy: • Trauma and TPD (own occupation) can no longer be commenced inside super so may need separate non-super policies – this may result in higher total policy fees |
| – | Restricted beneficiaries; • Only the member can be paid a disability benefit • Beneficiaries of a death benefit are limited under SIS legislation |
| – | Diminished retirement savings: • Payment of the premiums reduces accumulated savings unless additional contributions are made |
Most of the benefits of holding insurance inside superannuation focus on making insurance more accessible and the effective cost cheaper. But problems can occur when a claim is payable. It is important that our advice to you includes a full comparative analysis.