Insurances and superannuation
Some forms of risk insurance do well inside super. Some don’t. It is important to know which is which.
It has always been a smart strategy to recommend life insurance be held inside a client’s super fund. This effectively makes the premium tax deductible, which maximises the after tax efficiency of the premium. In summary, it gets more after tax sum insured for the same after tax premium, so it’s definitely in most client’s best interests to do this.
Traditionally income protection insurance was not held inside a super fund because of concerns about when benefits could be paid: the circumstances giving rise to a benefit being paid may not be a condition of release under the super law.
Since 1 July 2014 these concerns have disappeared: all insurances offered inside a super fund must have policy wordings that align with the conditions of release under the super law. This means income protection benefits have narrowed, to align with the more restrictive conditions of release. But the good news is benefits can be funded out of super benefits.
This is particularly pertinent to clients with clear and significant risk insurance needs, but a limited capacity to pay out of non-super monies.
It can be a good strategy for a client to hold income protection insurance through a super fund and it is important to understand that:
- this may mean a less generous definition of disability
- there are no significant tax benefits because the premiums would have been tax deductible anyway
- long term retirement benefits will be less than otherwise
- additional catch up super contributions may be needed in later years.
We weigh the advantage of increased short term insurance cover against the disadvantage of decreased long term retirement benefits. The client’s particular circumstances including their current and future income prospects, their family obligations, their total wealth including both their super and non-super assets, their eligibility for Centrelink benefits, their age and state of health and the likelihood of a claim being made.
We always properly consider the effect of recommending risk insurances on our client’s long term retirement prospects. It’s a good idea to suggest the premiums be compensated by additional contributions earmarked to pay the premium, assuming affordability is not an issue. In all cases we make sure our clients understand that paying the premium out of super means his or her retirement benefits will be less than otherwise, and that they accept the compromise between their need for adequate insurance now and their long term retirement, and or some other retirement strategy is in place.
This advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. Contact us and come in for a chat.
