Insurance Inside Superannuation

With the superannuation and SMSF sector growing at a rapid rate, the need for public offer and industry super funds to provide a compelling offer to members is more important than ever before. One key area in which super funds seek to provide additional value to their members is through the “wholesale” purchase of various types of insurances that most members are eligible to access.

The importance of income protection can’t be questioned, which is why most Australian’s are happy for their super fund to provide them with seemingly ‘cheap’ income protection insurance. This, combined with the often misguided thought pattern that paying for something with your superannuation is simply utilising money that you can’t use otherwise, has created a perfect storm in Australia whereby  many people are finding out the hard way that ‘cheap is expensive’ in the long run.

Although most retail insurers in Australia allow their products to be funded from superannuation, generally their product is more comprehensive than what is available through a public offer or industry super fund, because superannuation legislation ensures that these products when inside super are more limited than what they would be if held outside super – with little or no difference in price!

Pitfalls of Insurance Inside Super

A more complex claims process – When making an income protection claim you will be required to first have the claim processed by the insurance company and then also by the super fund itself. Trustees of superfunds have an obligation to ensure that all funds released from super satisfy a condition of release. The Superannuation Industry Supervision Act states that in order for a member to receive a replacement income stream from super, they will need to satisfy the temporary incapacity condition of release. This is contrasted with a policy held outside of super where a claimant simply has to meet the insurer’s requirements.

A simpler, less comprehensive product – Superannuation legislation states that income protection held inside super is only able to offer protection against a defined loss in income. There are a number of features that are present in the better quality retail income protection policies that provide you with additional support and relief should you need it. The benefits include but aren’t limited to a trauma benefit (pays you a lump sum upon being diagnosed with one of a number of diseases), a specific injuries benefit (pays you a lump sum should you suffer one of a number of injuries), child care benefit (reimburses you for certain child care expenses) as well as a children’s trauma benefit (pays you a lump sum if a child of yours is diagnosed with one of a number of diseases).  As well as this, products provided by super funds are often limited in terms of the benefit period available in comparison to what is available through an adviser.

Indemnity contracts – Income protection held inside a super fund or an SMSF can only be an indemnity style policy. What this means is that, at the time of claim, you will have to prove to the insurer you had been, immeditately prior to disability, been earning enough income to justify your monthly benefit. This presents a significant hazard if you are self-employed and your income fluctuates or if, for any reason, you are earning less money than you were when you setup the policy.

More uncertainty – Due to the fact that income protection policies held inside super are subject to superannuation legislation, there is significant uncertainty around the payout you are entitled to.  The reason for this is that superannuation legislation stipulates that you are only eligible to receive a temporary incapacity payout in line with your income immediately prior to becoming disabled. The impact of this can be far-reaching should you be unemployed at the time of becoming disabled as you may well be ineligible to access any of the funds that your income protection  policy is paying to your super fund.

The fine print – Recently the insurance provided by super funds has been given significant media attention due to the fine print that exists in these policies. Many super funds have clauses that stipulate a member is unable to claim if they have not made a contribution in the previous 12 months or if their balance falls below a certain level. As well as this, a number of industry super funds or group super plans have clauses relating to any changes to your employment, creating further uncertainty should you decide to change jobs or be made redundant. This can have a severe impact on someone that is taking a career break, in between jobs or approaching retirement.

Wasting your contributions cap – With a reduced concessional contributions cap comes a greater responsibility to use it most effectively. Income protection premiums that are funded personally are generally fully tax deductible, often making the tax effectiveness of personal and super owned policies the same. By paying your premiums personally, you could well be freeing up space in your contributions cap to make additional tax effective superannuation contributions.

Using your retirement savings – Your superannuation  is in place to provide for you in retirement and it should  be treated as such. Funding your income protection policy with your super, without topping up your super in a similar fashion, could result in your retirement savings being depleted.

These are some of the more significant downsides to having income protection held inside super and it is why we typically do not recommend it. Unless it would be impossible for you to afford the premiums otherwise, we implore you to give careful consideration to just how much you will be ‘saving’ by opting to fund your income protection by super.

Don’t put off your insurance until it’s too late.
Call Curo now to speak to your personal advisor, on 1300 665 356.

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