Part 1 – Life and Total Permanent Disablement (TPD)
Regulatory changes in the past few years mean that you are no longer restricted to the insurance arranged by your superannuation provider. Life insurance with or without a linked TPD benefit can be issued by an insurer who can request the premiums annually from an Australian compliant superannuation fund. The change is positive for Hudson members as it opens the insurance market for competitive premiums. But why have your insurance premiums paid from your superannuation account? Why Not?
The argument for Why includes the following reasons: –
1) Cash Flow – this is the primary reason for why Life insurance with or without a linked TPD benefit is paid from a superannuation account. Premium payment from a superannuation account frees the household budget from insurance costs.
2) Cost effective – when premiums are paid annually from a superannuation account the insurance provider passes on the 15% rebate applied when insurance premiums are paid via a partial rollover from a superannuation account.
3) Ease of Premium payment – the insurance provider will request the annual premium from your superannuation account. For many, this eases the burden of remembering to pay for an annual premium or remembering to update the payment details for premium collection if you have changed bank accounts or credit cards.
4) Stability of insurance – This is a big advantage for those who are employed on contracts or who work in occupations that are subject to periods of unstable employment. Having Life insurance with or without a linked TPD benefit means that should you cease employment your insurance cover does not stop, or lapse provided the annual premiums continue to be paid from your superannuation account.
5) Consolidation of insurance – Holding one Life insurance policy with or without a linked TPD benefit paid through your superannuation account allows consolidation of any additional Life/TPD insurances you may have within superannuation funds and saves the premiums that are being collected for the additional insurance covers. If you have multiple superannuation accounts you may have insurance covers attached to these accounts, if so, you are paying premiums for all the additional insurance covers.
The argument for Why Not:-
1) The erosion of your superannuation balance – this is especially relevant if the balance of your superannuation account is low and you disregard your insurance for a number of years. On stepped policies, insurance rises in cost each year due to a combination of factors including CPI accepted increases on the amounts of insurance, age indexation and any rate rises. All of this means that if you ignore your insurance for several years your once acceptable premiums may have increased considerably over time.
There are strategies to avoid the erosion of your super balance these include accepting your Hudson insurance review appointments each year enabling us to help you keep a check on the amount of insurance and the premiums each year. You may also wish to consider salary sacrificing into your superannuation account to offset the deduction made from your super to pay for your insurance premiums.
2) Tax – If you suffer an event or illness at under 60 years of age and claim on your TPD insurance held within superannuation, the TPD payment is taxed.
Life insurance will also be taxed if held within superannuation and your beneficiaries are adult non-dependents. This does not include your spouse but would include your adult non-dependent children meaning that your children may not come to receive the Life insurance benefit you planned for.
3) Slower payment of claim – When insurance is held within superannuation the trustee of the super fund approves the release of any insurance benefit. This is not to say that the insurance benefit will not be released but it may be a slower process than the realisation of a Life insurance benefit from a policy outside of superannuation as there is no trustee involved.
4) Cut off ages – Life insurance with or without a linked TPD benefit when within superannuation has expiry ages. Usually this is within the policy year that you turn 65.
Outside of superannuation, Life insurance can remain active until age beyond age 65.
5) Lapsed Beneficiary Nomination or No Beneficiary in place – If this is the case with your Life insurance the trustee of the superannuation will determine who receives your Life insurance benefit.
A strategy to avoid lapsed beneficiaries or not having nominated a beneficiary in place is to accept your annual Hudson review insurance appointments as this allows us to check this information for you.
As this article attempts to clarify, there are both advantages and disadvantages to holding Life insurance with or without a linked TPD benefit in superannuation. There is no one insurance solution that will suit everybody’s circumstances and insurance should never be a set and forget process as your insurance needs alter over time.
If you have any queries or wish to discuss the information provided in this article please contact Hudson Financial Planning to schedule a call with one of our insurance advisers.