Should I put insurance inside or outside of super?

October 06 2016
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Most superannuation funds now offer life insurance for their members, but is it worth paying premiums out of your super for it? Here’s what to consider.

Should I put insurance inside or outside of super?

If you’re reviewing your life insurance, check what cover you have through your super fund so you can compare it with other options. Like all insurance policies, when you have insurance inside super you will pay insurance premiums. However, if your insurance is through your super fund, the premiums are deducted from your super account balance, rather than being paid out of your household budget. But is putting insurance into super a good idea? As with anything, there are pros and cons, and we’ve compiled a list of the major considerations for you.

You can be covered even if you can’t afford it

If money is tight, putting insurance inside of super will help your cash flow. We have 9.5 per cent of our income going into super that we can’t touch, so it’s a good source of funds to pay for insurance when you otherwise can’t afford it. However, keep in mind that the insurance premiums will be eroding your retirement savings, so if possible, put a little more into your super to cover for it.

It may cost you less

It’s often cheaper to have insurance inside of super because super funds purchase insurance policies in bulk and can pass the savings on to members. Be careful though, not all insurance policies are the same and just because it’s cheaper doesn’t mean it’s better.

It can be more tax effective

Term Life and Total and Permanent Disablement (TPD) insurance is typically not tax deductible. However, your super fund can claim a tax deduction on these insurances. Furthermore, the money in your super fund is contributed before tax. This means you received a tax deduction for this money in the first place, so you’re really using pre-tax dollars to pay for your insurance. However, keep in mind that insurance payouts from a super fund to your family may be taxable, and it’s also important to ensure that you’ve sorted out who your super beneficiary is.

You may get cover without a health check

Some super funds will allow automatic acceptance of a member to their insurance policy without being medically underwritten. The means they’re not going to ask you about your medical history which can make a massive difference if you have pre-existing medical conditions. Before you get too excited though, note there is usually a limit to how much insurance you can automatically get.

You might not get paid out

It’s possible that your super fund will be paid upon an insurable event, however it’s not guaranteed that your super fund will pay that money out to you. You must reach a condition of release, such as permanent or temporary incapacity, in addition to the insurance policy definitions. If you don’t meet a condition of superannuation release, the money will remain in your super fund and won’t be able to provide the financial support you may need during a difficult period.

Brenton Tong, director, Financial Spectrum

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Retirement