Q. What are the advantages of owning insurance inside Super? I have Death and Total Permanent Disability insurance provided by my Employer via my Superannuation fund. I am 53, divorced with 2 adult children who do not rely on me for financial support. My children are the nominated beneficiaries of my Superannuation benefits. I have sufficient insurance cover to pay off my mortgage if something was to happen.
A. When considering whether to hold life insurance inside or outside super, you need to consider your personal circumstances, the insurable need and the tax consequences applicable to the premiums and more importantly the death proceeds.
An advantage of holding insurance via Super is that as it is an employer plan, the premiums typically will be priced at a lower rate compared to what you can secure via retail cover. But this is always worth checking.
Insurance premiums paid from Superannuation are paid from your accumulated Superannuation fund balance or from pre-tax Superannuation contributions. If you were paying for Life Insurance outside of Superannuation you would have to fund the cost from personal after-tax income. So if your cash flow is tight or you are focussing on paying off a mortgage or personal debt, it can be advantageous to have your insurance costs funded from your Superannuation.
Whilst using Superannuation to fund your insurance may provide short-term cash flow relief, the cost of insurance premiums can impact your long-term retirement savings.
You also need to take into consideration the tax consequences on your death. Generally speaking, if you own the insurance outside of Superannuation, the proceeds are tax-free unless the policy ownership has changed, whereby a Capital Gains Tax liability may apply.
The tax on Superannuation benefits varies and you need to be very careful and understand what tax liabilities may exist. If proceeds are payable to a tax dependent; Spouse, children under 18, children under 25 financially dependent upon you (unless disabled) or someone financially dependent upon you or interdependent with you, the proceeds are tax-free.
Superannuation benefits including insurance paid to non “tax dependent” beneficiaries such as adult children are taxed at 15%, or where the Super fund has claimed a tax deduction for the insurance premiums, the proceeds are taxed at 30%. Therefore you would need to consider carefully these tax consequences and whether it may be better to hold the life cover outside of Super.
If you are in the position of knowing you will die in the foreseeable future; for example, if you were suffering from terminal Cancer, please get advice urgently on the options immediately available to you. You may be able to have your Superannuation and insurance benefits paid out whilst you are still alive, thereby minimising the tax implications. You may also be able to manage how and to whom the proceed are paid via your Superannuation death benefit nomination or via your Will.
It is really important that you review how much insurance cover you have in place to ensure the cover reflects your needs; that you are not paying for too much cover but conversely that you have sufficient cover in place.
If you feel you have sufficient insurance, “stress test” your thesis. Work through the scenarios on a “what if basis”. Ensure that the insurance you have covers the correct insurable events with the right amount of cover. Consider the impact of unexpected medical care or rehabilitation costs. Make sure you take into consideration your short and long-term Financial Planning needs. For example, would your retirement funding goals be met if you couldn’t work?
It is important to understand the tax consequences on your death for beneficiaries and also options you have with the insurance to minimise the tax impact. By careful planning of who receives benefits from either within or outside Superannuation, you can manage this risk.
Ultimately you should be aiming to have the right amount money go to the right people, at the right time. Ensure your Will is up to date and reflects your wishes. Consider utilising a non-lapsing Binding Nomination for your Superannuation benefits so the Trustee of the fund has no discretion in terms of distributing your Superannuation entitlements.