Understanding Insurance in Superannuation

Owning insurance inside superannuation can be a tax-effective way to structure the insurance cover you need.

What are the benefits?

Premiums may be paid tax-effectively.
Your cash flow may improve because premiums are not paid personally.
After-tax contributions to super may be eligible for the co-contribution to help cover the cost of premiums.
Some funds automatically accept you for cover without requiring a health check.
Employer superannuation fund members may be eligible for group cover to reduce the cost of premiums and reduce any underwriting requirements.
In the event of a successful claim, proceeds may be able to be taken as a superannuation pension.

How does insurance in superannuation work?

Certain types of life insurance can be owned inside superannuation. These insurances generally include life cover, total and permanent disablement (TPD) and salary continuance. Owning insurance inside super means that the insurance policy is owned by the trustee of the super fund on your behalf instead of being owned directly by you. This ownership structure allows you to take advantage of tax concessions associated with super. However, it can also have some disadvantages (as noted under ‘Disadvantages of owning insurance in super’ below).

Paying the premium

The superannuation tax concessions offer a tax-effective way for you to pay insurance premiums. This is because your premiums can be paid from pre-tax contributions such as superannuation guarantee (SG), salary sacrifice or personal deductible contributions.

These contributions are generally subject to 15% tax in the super fund. However, a super fund may be eligible to claim a tax deduction for the cost of insurance premiums, and some super funds will pass this tax saving on to you through a reduction in the contribution tax.

Low-income earners and members of a couple can also benefit:

Low-income earners who are eligible for the superannuation co-contribution can use the co-contribution to help cover the cost of insurance premiums.
If you are a member of a couple, spouse contributions (which may entitle the contributor to a spouse contribution tax offset of up to $540) could be used to pay premiums.

Another advantage of owning insurance inside super is the reduced impact on your cash flow:

If there are periods where you are not making contributions to super, your accumulated savings can be used to continue paying premiums and thereby continue the cover.
If you are a member of a couple, your spouse’s concessional contributions may be able to be split into your account to pay for the cover.
If you have more than one super account, rolling some funds from another account into the account with the insurance cover is another option to help pay for the cover.

Making a claim on a super-owned policy

Owning insurance inside super can also provide advantages if you make a successful claim on your insurance policy. Superannuation is generally not dealt with by your will. If a successful claim is made on a policy owned within super, the proceeds will be paid to your superannuation fund as the insurance policy owner. The trustee of your superannuation fund will then determine how and when the proceeds should be paid per the fund’s trust deed and superannuation law.

Some of the advantages compared with non-super owned policies include:

In respect of TPD cover, if you don’t need all the proceeds immediately, you may be able to leave the proceeds inside super where the earnings can accrue tax-effectively (earnings are taxed at a maximum rate of just 15%).
Retaining TPD proceeds inside super also enables you to defer (or eliminate) the lump sum tax that applies if TPD proceeds are withdrawn from super before age 60.
TPD proceeds may be able to be used to start a superannuation pension. The pension provides you with regular cash flow, and earnings within the pension are tax-free.
Regarding life cover, your superannuation fund may allow your nominated beneficiary (if eligible) to start a pension or pay multiple pensions if your death benefit is to be paid to more than one eligible person (e.g. spouse and children). The pension can provide your beneficiaries with regular income, and earnings within the pension are tax-free.

Disadvantages of owning insurance in super

There are some disadvantages of owning insurance inside super compared to owning it in your own name. The following disadvantages need to be weighed up against the advantages outlined above.

Insurance policies offered through superannuation may be more restrictive or have fewer features and extras than those offered outside of super.
Since 1 July 2014, new TPD (own occupation) and trauma policies cannot be owned inside super.
Using super contributions or your accumulated super balance to pay insurance premiums reduces your superannuation savings because every dollar spent on premiums is one less dollar invested in your super fund. So, rather than paying for insurance using your current cash flow, you are effectively paying for it from your retirement savings. If your retirement savings end up being insufficient for your needs, you may need to work longer to save more for retirement or reduce your level of retirement income. Due to the effect of compounding, the longer you have until retirement, the greater the potential impact of this investment loss.
Depending on your circumstances, in the event of a successful insurance claim, it could take a superannuation trustee longer to process and pay a benefit than may be the case for insurance owned outside of super.
TPD proceeds paid from superannuation may be taxable if withdrawn before age 60, whereas TPD proceeds paid from a policy owned outside of super are generally tax-free.
Life insurance held inside super will be paid out as a superannuation death benefit. If paid to a non-tax dependant, tax of up to 32% (including Medicare levy) may apply. Life insurance owned outside of super is generally paid tax-free.
Superannuation trustees may choose to pay a superannuation death benefit to someone other than your intended beneficiary unless you establish a binding nomination. Binding nominations generally need to be reviewed every three years.

Other things you should know

If cancelling an insurance policy to purchase a new one in super, it is important to ensure the new one is in place before cancelling the old one to ensure continuous cover.
Insurance held inside super may be cancelled if your superannuation account is continuously inactive for at least 16 months unless you make an election to maintain the insurance. From 1 April 2020, insurance can also be cancelled if your superannuation balance is less than $6,000 unless you make an election to maintain the insurance. Your super fund will contact you if your insurance is about to end.
Concessional contributions to super are generally subject to 15% tax in the super fund. However, if you earn more than $250,000 per annum, an additional 15% tax may apply.
Concessional contributions are subject to contribution caps, which limit the amount that can be contributed to super.

Important Information

Walbrook Wealth Management is a trading name of Barbacane Advisors Pty Ltd (ABN 32 626 694 139; AFSL No. 512465). Barbacane Advisors Pty Ltd is authorised to provide financial services and advice. This post is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or needs, unless expressly indicated otherwise. You should consider whether the information is suitable for your circumstances and where uncertain, seek further professional advice. The author has based this communication on information from sources believed to be reliable at the time of its preparation. Despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice, and we are not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, we accept no liability for any loss or damage as a result of any reliance on this information.