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.
|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
• 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)
• 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
• 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.