Life insurance matters 

Having the right type and amount of insurance means you don't need to worry about how you might provide for your children, pay your mortgage and other bills, should you die prematurely, or illness prevents you from earning an income. So we know we all need insurance, but how do you actually get it and pay for it? 

In many cases you may choose to set up and pay for insurance through your super fund, but you can also do it outside of super, just as you insure your car or house.

Insurance through super

When you set up insurance through your super fund, your fund pays for the premium. But instead of you owning the insurance policy, it is owned by the trustee of your super fund. This means if you make a claim and any benefits are to be paid, the funds will go to the trustee. In the case of total and permanent disability and income protection benefits, the trustee will then pay these to you. However, when you pass away, the trustee will pay this benefit in accordance with your death benefit nomination.

To access your super you must first meet a condition of release. Ordinarily this is once you're over the age of 55 and retired - you can find out more about this here. But to gain access your insurance benefit before you retire, you will also have to access your super. This means you will need to meet your super fund's definition of permanent or temporary incapacity, or a terminal illness. 

In July 2014 there was a change to regulation which restricted the types of total and permanent disability insurance (TPD) you can obtain inside super, in certain circumstances.The change tightened the definition of TPD to ensure that your insurer's definition of total and permanent disability matches up with the one used by your super fund. This means means you should be able to quickly access your benefits on any TPD taken out since July 2014, via super. You can read more about this here.

You should know that you can engage the Superannuation Complaints Tribunal if your super fund is unable to release your insurance benefit. This is likely only to be relevant if you have an existing insurance policy taken out before July 2014, when the definition of certain medical conditions is less stringent than the condition of release definitions of your super fund.

Benefits of insurance inside

  • You can salary sacrifice additional money into super to pay for your insurance premium. This means you are paying less - you pay the premium with your superannuation funds, which are taxed at 15 per cent, instead of your income, which is taxed at your marginal tax rate. And if you choose not to salary-sacrifice it won't even reduce your take-home pay.
  • Your insurance premiums might be cheaper when you opt to buy group insurance via your super fund. Insurance premiums are automatically paid so there is little chance you won't have enough funds available to make payment.

Disadvantages of insurance inside

  • Because insurance benefits are paid first to the trustee of your super fund, then to you in the case of total and permanent disability or income protection, the process can take longer than if you have bought your own insurance directly.
  • When you pass away, benefits to any non-dependents can be taxed as much as 31.5%.
  • You might have a medical condition that triggers an insurance pay-out, but fail to meet the condition of release from your super fund. This is a potential issue for insurance policies arranged before 1 July 2014. See this story.
  • 'Own occupation' (which means the job you are in when you take out the insurance policy) TPD cover can no longer be arranged in super, following the changes that came into effect on 1 July 2014. 'Any occupation' TPD is still available.

Benefits of insurance outside

  • Any insurance benefit is paid directly to you or your beneficiaries, when you are the policy owner.
  • There is more flexibility as to what you can be insured for, allowing you to be covered for specific amounts and events.
  • You are likely to be entitled to a tax deduction on your income protection premium.

Disadvantages of insurance outside

  • You must pay for the premiums personally, meaning you miss out on any tax breaks of paying premiums through super.
  • Missed premium payments can cause your insurance policy to be cancelled.
  • You pay with after-income tax earnings - which for most people a higher rate than the 15 per cent tax that applies to super contributions - making it more expensive than buying insurance within super for many people.
  • brightday offers group insurance and retail insurance via your super fund. We also offer retail insurance outside your super fund.

From Insuring your family's future we learned that trauma, or critical illness insurance is only available outside super. If you want to receive TPD cover for your own occupation you must also arrange this outside super. 'Own occupation' is based on your ability to work in a job reflective of your education, training and experience. Whereas any occupation is just what is says. If you are highly trained and have a significant earning capacity in a specialised field you may want 'own occupation' insurance. Think of it as a form of compensation if you had to earn a lot less as a result of an injury. This is a little bit involved, so there is a whole piece dedicated to this topic here.

You can have both

So the good thing is you can hold insurance policies inside super and outside of super. For example you might want your life and TPD insurance held inside super, but income protection and trauma outside of super.

What's on offer

Inside super you can apply for either group or retail insurance. Group insurance is an insurance policy with many members so it helps the insurer manage the risks. Whereas retail insurance is where the insurer assesses your risk individually. You will need to decide whether group or retail insurance is for you - we talk more about this here.

Through brightday, Hannover offers our group insurance and TAL are on board for the retail offering.

General Advice warning:
Pearl Funds Management, an authorised representative AFS Rep No 001254808 of Banyan Securities Pty Ltd AFSL 484139
The information presented by us is general in nature and does not take into account your personal goals and objectives. It does not represent financial product advice. You should always seek independent legal and financial advice before making a decision in relation to a financial product. Read the Product Disclosure Statement (PDS) before making a decision. You should consider your own circumstances, needs and financial objectives before making a decision.

Kirstie Spicer
10 November 2014