Insurance: Inside or Outside of Super?

We all know that insurance is an important part of your financial well-being; it is a matter of providing money or replacing lost income at a time of financial difficulty.  However, the question I am always asked is; should I arrange for my insurances to be held inside or outside of super?

Having appropriate insurance in place will give you and your family financial peace of mind in the unfortunate event should you die, become sick or are injured and are unable to work.  When it comes to life insurance, Australia is one of the most under-insured countries in the world [1].   Put simply; only 4% of Australians with children have a sufficient level of insurance coverage.

What are the different types of insurance?

Life insurance provides financial protection in the event of death and in some cases, terminal illness.

Total and Permanent Disability (TPD) pays a lump sum if you become Totally and Permanently Disabled as the result of an injury or illness that will prevent you from ever being able to resume either your own or any occupation.

Income Protection policy will pay you a regular income in the event you are unable to work due to illness or injury.  Income Protection insurance generally replaces up to 75% of your monthly income.

Trauma Protection or Critical Illness insurance provides a cash lump sum on the diagnosis of a medical condition. The number of conditions covered (benefits) varies widely.


As a financial adviser, it is one of my objectives to create wealth for my clients and part of that is to ensure I protect it as well.  This will ensure my clients families are looked after in the event of the unexpected.  Deciding whether to hold insurances inside or outside of super involves assessing the tax implications, benefit access implications (social security) and the best option for each individual’s ability to; a) pay the premium and b) ensure that the proceeds are received by the intended persons in the most tax effective way. There are pros and cons with relying on your super for all your insurance needs.   Here are some of the major ones to consider:


PROS

• No medical examinations are required to take out basic/default level of cover inside super.
• Super policies often include total and permanent disablement (TPD) and Income Protection in a default superannuation offering.
• It is tax effective.  The premiums are paid out of SG contributions made by your employer or from personal contributions (for the self-employed) or are paid from pre-tax income, in the case of salary sacrifice contributions.
• Premiums can be deducted from super contributions.

CONS

• Default levels of cover are minimum and do not take into account your earnings and lifestyle.
• There can be delays with life insurance benefits being paid as payment initially is made to the super fund.  This can be a lengthy and frustrating process for your loved ones.
• If you have not made a binding beneficiary nomination, you can’t be 100% certain your benefit will be given to the intended recipients.
• Trauma insurance is not available through your fund.
• Income protection benefit payments are paid to the super fund which will then need to be sent to you as the recipient, adding delays to receiving your payment.

It’s always better to have some insurance in place rather than none, but it’s wise to know exactly what your insurance will or won’t pay and in what circumstances. Remember, there is nothing to stop you from taking out cover from both inside and outside of your super fund. We at LJ Financial are able to help you structure your insurances to ensure you are maximising your benefits.

Silvia Infante
Financial Adviser

[1] Investment and Financial Services Association of Australia (IFSA)