Insuring through super | Accurium

Pros and Cons

Insurance benefits available through superannuation 

One of the legal purposes of superannuation funds is to provide insurance benefits. Superannuation funds in Australia generally offer insurance to cover the financial risks associated with death, permanent disability and temporary disability or illness.  

Insurance is arranged by the superannuation fund trustee acting on behalf of the members of the fund. Similarly, the trustee of a self-managed super fund (SMSF) can obtain insurance for fund members. In fact, it is a requirement for an SMSF trustee to consider insurance as a part of reviewing their investment strategy… even if the members hold sufficient insurance outside superannuation.  

Obtaining insurance through retail or industry superannuation funds is relatively simple. Funds offer default insurance cover at a level deemed to meet only basic insurance requirements. Default insurance will include death cover and may or may not include disability cover and income protection. This default insurance is offered on an ‘opt-out’ basis. If no active decision regarding insurance is made by the member, they will automatically receive the fund’s default level of insurance. Members can choose to increase, decrease or cancel their cover to meet their individual needs.  

From 1 July 2019, the law requires a superannuation fund to cancel insurance on inactive accounts that haven’t received contributions for at least 16 months. Funds may also have their own requirements for maintaining insurance in a superannuation account, e.g. a minimum balance. Further, default insurance will not be provided to a new fund member under age 25, unless requested by the member or they are in a dangerous occupation. 

In an SMSF an insurance policy can be obtained for members of the fund, however, this needs to be actively sought by the trustees. There are no default insurance arrangements in SMSFs.  

Whether through an industry/retail fund or a SMSF, premiums will be deducted from a member’s superannuation account and will reduce their superannuation balance and future retirement benefits. 

From 1 July 2014, a trustee of a superannuation fund is prohibited from providing an ‘insured benefit’ in relation to a member unless the insured event is consistent with one of the following conditions of release outlined in Schedule 1 in the SIS regulations1:

  • Death;
  • Terminal medical condition;
  • Permanent incapacity;
  • Temporary incapacity. 

Consequently, insured events coincide with a superannuation condition of release, ensuring that insurance proceeds paid to the superannuation fund can also be paid to the member or their dependants. Insurance policies that provide benefits that are not consistent with the above conditions of release cannot be take out by a superannuation fund. Examples of prohibited policies include:

  • Total and permanent disability (TPD) policy with an ‘own occupation’ definition. The Schedule 1 permanent incapacity condition of release is based on an ‘any occupation’ definition;
  • Trauma insurance;
  • Income protection policy with an agreed value cover. 

Grandfathering provisions allow a superannuation fund to retain insurance policies taken out prior to 1 July 2014 that include an insured benefit that is not consistent with the stated Schedule 1 conditions of release. However, this can cause issues because, although insurance proceeds may be paid to a superannuation fund, the member may not meet a Schedule 1 condition of release and therefore cannot access the insurance benefit. 

Given the restrictions on features for an insurance policy held under a superannuation fund, members should consider their needs to determine what insurance policy features are required and whether a policy offering such features can be held within superannuation or must be held under a non-super policy. For example, if a member believes that a TPD policy with an ‘own occupation’ definition better suits their requirements, such a policy would not be able to be held within superannuation. Consideration can be given to a split TPD policy, which involves separate TPD policies, with the primary policy being held inside superannuation and provides ‘any occupation’ TPD, whilst a second policy is held outside super and provides ‘own occupation’ TPD. 

The most common types and main features of insurance available through super are described below. 

Life insurance

A benefit is payable on death and is normally paid as a lump sum or income stream to beneficiaries. This insurance is useful for providing financial security to dependents who can use the benefit to pay off any outstanding debts and cover ongoing expenses. 

Terminal medical condition

A benefit is payable where two registered medical practitioners have certified that a person is suffering from an illness or injury that is likely to result in their death within 24 months. One of the medical practitioners must be a specialist practising in the area of the illness or injury. Further, for the terminal medical condition benefit to be paid the 24 month certification period must not have ended. 

Total and Permanent Disability (TPD) Insurance

For new TPD policies taken out from 1 July 2014 the benefit payable must be based on the ‘any occupation’ basis. Generally, a benefit is payable if a member is seriously disabled and unlikely ever to work again. The benefit is normally paid in the form of a lump sum benefit or income stream (pension). It is useful for debt repayments, costs of rehabilitation and future costs of living. 

Income protection insurance

Generally, a benefit is paid if a member cannot work due to temporary disability or illness (whether physical or mental). A temporary incapacity benefit can only be paid in the form of a non-commutable income stream (pension) for the period of temporary incapacity and cannot be more than the level of income the member was earning before the temporary incapacity. It is useful for replacing salary when unable to work. However, such policies are generally held outside of superannuation due to how premiums and income are treated for income tax purposes. 

Taxation of premiums and benefits

How insurance premiums and benefits are taxed is an important consideration when looking at holding insurance inside or outside of superannuation. The table below summarises the tax treatment of benefits and premiums from pre-tax income (paid in super) and post-tax income (paid outside super).

Type of Insurance

Held inside super

Held outside super

Total and Permanent Disability (TPD)  Premium Premiums may be fully or partially tax-deductible to the super fund* Premiums not tax-deductible
Benefit Benefits are generally taxed as a super withdrawal. Tax free
Death Premium Premiums are tax-deductible to the super fund* Premiums not tax-deductible
Benefit Tax free to superannuation tax dependants. Non-tax dependants taxed up to 32% Tax free to any beneficiary
Income Protection (Salary continuance) Premium  Premiums are tax deductible to the super fund* Premiums are tax-deductible
Benefit Subject to personal income tax rates Subject to personal income tax rates

* However, if super contributions are made to cover premiums, the member may benefit from reduced personal income tax and access to increased other Government benefits. 

How a benefit from super is taxed depends on the individual’s circumstances when the benefit is paid. The net benefit may be the same, less or more than that of a policy held outside of super.  

For more information on the tax treatment of insurance premiums in an SMSF visit our article on that topic: ‘Deductibility of insurance premiums in an SMSF’.

Advantages and disadvantages of insuring through superannuation

The Australian Securities and Investment Commission (ASIC) MoneySmart website outlines some Pros and Cons of obtaining insurance through superannuation which are re-produced below: 

Pros

Cheaper premiums: Premiums are often cheaper as the super fund buys insurance policies in bulk. 
Easy to pay: Insurance premiums are automatically deducted from your super balance.
Fewer health checks: Most super funds will accept you for a default level of cover without health checks. This can be useful if you work in a high-risk job or have health conditions that can make it difficult to get insurance outside super. Check the product disclosure statement (PDS) to see the exclusions and treatment of pre-existing conditions. 
Increased cover: You can usually increase the amount of cover you have above the default level. But you'll generally have to answer questions about your medical history and do a medical check.
Tax-effective payments: Your employer's super contributions and salary sacrifice contributions are taxed at 15%. This is lower than the marginal tax rate for most people. This can make paying for insurance through super tax-effective.

Cons

Ends at age 65 or 70: TPD insurance cover in super usually ends at age 65. Life cover usually ends at age 70. Outside of super, cover generally continues as long as you pay the premiums.
Limited cover: The amount of cover you can get in super is often lower than the cover you can get outside super. Default insurance through super isn't specific to your circumstance and some eligibility requirements may apply.
Cover can end: If you change super funds, your contributions stop or your super account becomes inactive, your cover may end. You could end up with no insurance. 
Reduces your super balance: Insurance premiums are deducted from your super balance. This reduces your savings for retirement.

For an SMSF in particular, the fund may not be able to obtain bulk insurance premium prices and therefore insurance may be more expensive than in a larger super fund. However, SMSFs may have more control over the benefit payments. Often the payment of a benefit by the trustee can be easily facilitated because the trustees are also members allowing a decision to be made quickly to release the benefits to the member or their beneficiaries. Further, members of an SMSF, who are generally the trustee or director of the corporate trustee, are able to select insurance policies that best suit their requirements from a wide range of product providers. 

Summary

Overall, obtaining insurance through superannuation is often simple and cheaper to obtain, especially in industry/retail super funds. For SMSFs, obtaining insurance may be a little more complicated, but many of the same principles apply.  

Some final suggestions regarding insurance:

  • Be mindful that the default insurance option is often insufficient to cover a member’s full insurance requirements. Ensure that sufficient and appropriate additional insurance is selected as necessary for each member’s circumstances so that they are not under insured.
  • Review insurance regularly. When a member gets married for example, they might wish to update the beneficiaries of their superannuation and insurance policy. Similarly, as salary increases or personal debt levels change members will require different levels of insurance to cover changing or new financial risks.
  • If looking to nominate non-tax dependents as superannuation beneficiaries, members need to understand the taxation implications involved.

Disclaimer

This information is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, legal advice or tax advice, and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. The information is provided in good faith and derived from sources believed to be accurate and current at the date of publication. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. We recommend that you seek appropriate professional advice before making any financial decisions.