Q: What are the advantages of owning insurance inside Super? I have life insurance provided by my employer via my Superannuation fund. I am single with 2 adult children who are the nominated beneficiaries.
A: When considering whether to hold life insurance inside or outside super, you need to consider your personal insurable needs, any tax benefits applicable to the premiums and more importantly the tax consequences applicable on death.
An advantage of holding insurance via superannuation in an employer plan is that the premiums typically will be priced at a lower cost “group” rate compared to what you can secure via personal retail cover. This is always worth checking when comparing offers of insurance.
Insurance premiums paid from superannuation are paid from your accumulated superannuation fund balance or often from pre-tax superannuation contributions. If premiums are being funded by making additional super contributions, these may attract various tax or other government benefits potentially making it a more efficient way to fund your premiums.
On the other hand, 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.
One disadvantage of using superannuation to fund your insurance is that 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 in certain circumstances.
The tax on superannuation death benefits varies and you need to be very careful and understand what tax liabilities may exist. If proceeds are payable as a lump sum to a tax dependent; such as a spouse, children under 18, or someone financially dependent upon you or in an interdependency relationship with you, the proceeds are tax-free.
When superannuation benefits, containing insurance proceeds, are paid as a lump sum to non “tax dependent” beneficiaries such as independent adult children, the taxable portion of the benefit will be subject to tax. Part of this taxable component will be taxed at 15% (plus Medicare Levy), while the remainder will be taxed at 30% (plus Medicare Levy). Therefore you would need to consider carefully these tax consequences as it may be better for you to hold the life insurance cover outside of superannuation.
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 of 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.
Q: I have just received an e-mail from my Super fund warning me that my life insurance will be cancelled if I don’t advise them I wish to keep the cover. Why is my insurance cover at risk of being cancelled?
A: On 18 February, some elements of the “protecting your superannuation package” which was announced in the 2018-9 Federal Budget were passed by the Senate into law. One of the elements that passed was the obligation that Superannuation Trustees cancel insurance on Superannuation accounts that have been deemed inactive.
An inactive Superannuation account is defined as an account that has had no contributions or rollovers into the fund for a continuous period of 16 months.
On 1 April, all Superannuation Trustees were obliged to communicate to Superannuation fund members who were identified as having an account that had been inactive for a period of six months, warning them of this law change.
If you wish to retain the insurance cover, you need to act now. You may instruct the Trustee that you wish to retain the cover either via e-mail or in writing. Some Trustees may require a form to be completed.
If you do not advise the Trustee that you wish to retain the insurance and your account has been inactive for 16 months or more on or after 1 July 2019, the Trustee will have no alternative other than to cancel the cover you have in place. The alternative to notifying the Trustee is to have a contribution made to your fund before the 16 months inactivity period elapses.
If you choose to keep your insurance, you can alter or cancel the cover at any time by contacting the insurer. However, it is important to know that if your insurance is cancelled and you decide later to re-apply, you may need to provide further medical and employment information and be subject to full underwriting.
This will be a major issue for those who are in poor health or are uninsurable due to age or circumstances such as unemployment. Once the insurance is cancelled, it is unlikely they will get it back.
Determine your Life insurance needs and seek advice on the suitability of your current insurance benefits. If you feel you don’t need the cover, then please as a final step, visit your GP for a health check, just to make sure all is well on the health front before the cover is terminated.