Insurance – should you purchase cover inside your superannuation or independently?
By Jim Vass
With the government changes to superannuation looming, changes which mean insurance in an ‘inactive’ super account (one you haven’t made a regular contribution to in 16 months) will be cancelled by 30 June unless you opt to retain it, it’s time to consider the differences between having insurance cover within super, or outside of super.
Insurance inside superannuation versus outside
Most superannuation funds offer insurance within the fund itself.
For the purposes of this blog, this is what we mean by insurance ‘inside’ super. When we talk about insurance ‘outside’ of super, we mean insurance that you have purchased yourself, completely separate from your superannuation.
So what’s the difference?
The main difference is affordability. When you have insurance inside your super you can pay for it in a variety of ways – either with funds from your employer’s compulsory super contributions or via salary sacrifice, or the premiums can be drawn from your accumulated super balance.
Essentially – you’re not paying for it yourself. That is, you are not physically taking money from your bank account to pay the premiums. It’s taken care of within your super.
And for this reason, it’s been a great idea. Because for years now, studies have shown that Australians, on the whole, are vastly underinsured. The ‘inside super’ option gave many people an easy and ‘affordable’ way to access life insurance, total and permanent disability insurance and income protection insurance.
But as a result of the Royal Commission into Finance and Banking, a raft of changes are being introduced to superannuation and these could affect your insurance. Right now, you need to check what cover you’ve got, and decide whether or not you want to keep it. And you need to do this by June 30, 2019. Otherwise you could end up having your policy inadvertently cancelled.
Insurance is important, and while the insurances offered inside super tend to be fairly generic, at least they offer protection if you should ever need it.
Tailored insurance
Personalised, tailored insurance is a policy you arrange with an insurer directly. The benefit of personalised insurance is that it’s a ‘perfect fit’ for you. You can choose a variety of cover types and payout levels.
Personalised tailored insurances are also available within superannuation; however, the majority of insurances held within super are the default insurance offered by the fund.
Life has a way of surprising us
Insurance outside of super is more expensive because you’re paying for it out of your after tax income.
For simplicity’s sake, let’s assume that your insurance premium costs you $1000, and the tax rate is 50%. Then you really need to earn $2000 to be left with $1000 after tax to pay for the premium.
If we apply the same principle inside super, you’d pay $1000, but you could fund the premium in other ways that leave more cash in your pocket.
But really, if you need to claim on your insurance, then something big, stressful and life changing has occurred, and at this point you’re not going to be quibbling over what you paid in premiums. You’re going to be exceptionally glad that you have adequate insurance and that the insurance payout will provide you with enough money to keep your life on track while you’re recovering, or helping a loved-one to recover, and figuring out what to do next.
Deciding whether or not to have insurance inside super is a personal choice, based on what you need.
Insurance advisors often call insurance ‘wealth protection’ – and that is exactly what it is designed for – to provide you with funds to face the unexpected, without eroding your bank balance, the value of your accumulated assets, or the business you’ve worked so hard for.
Thinking about insurance is confronting. But what’s more confronting is risking the loss of everything you’ve worked hard for because you don’t have enough insurance cover, or the right insurance cover.
Right now, make sure you check your insurance in superannuation by 30 June. And if we can help you understand more about tailored, personal insurance, talk to us.
Please note: The information provided in this article is general in nature and should not be considered personal advice.
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