Insurance cover – should it be held inside or outside of super?

Current as of 18 November 2015

 

Deciding whether to have your insurance held within super or outside super is not an easy decision so it’s best to be well informed before taking out a new policy or reviewing an existing one.

There are 3 types of insurance cover that can be held inside super:

  • Life insurance
  • Total and permanent disability (TPD) insurance – “any” occupation only
  • Income protection insurance

Trauma insurance is not permitted to be held inside super.

So what are the pros and cons?

Insurance inside super – pros and cons:

  • Cash flow and tax effectiveness: premiums are paid with pre-tax dollars leaving more money in your pockets
  • Discounted premiums: as there is group buying power in the purchase of insurance cover especially by the big super funds, the premiums may be cheaper than if the same policy was held outside super
  • Accessibility of cover and proceeds: no medical examinations are required for basic levels of cover however the benefits may not be accessible until retirement
  • Taxation of death benefits: depending on whom these are paid to, it maybe taxed (e.g. children over 18 that are not financially dependant)
  • Types and level of cover are limited: TPD “own” occupation cannot be held via super (see below); trauma cover is not available and most income protection policies inside super only have a two year payment period

What about outside super?:

  • Portability of cover and proceeds: if you change employers your insurance continues regardless of where you work and there is immediate access to benefits as the proceeds are paid directly to the policy owner
  • Flexibility of cover: TPD “own” occupation is available and income protection policies have a longer payment period
  • Cash flow: detrimental as premiums are paid with post-tax dollars

As additional clarification of the information above, Total and Permanent Disability (TPD) cover provides insurance that pays a lump sum amount if you’re unable to work due to total or permanent disability from accident or illness.

With two definitions of disablement, care must be taken to ensure the correct coverage is taken out:

  • “any” occupation means the inability to perform any occupation to which you are suited by education, training or experience;
  • “own” occupation means never able to return to occupations similar to your current occupation.

As usual, if you are thinking about taking up insurance speak with us first to work out what is best for your circumstances.

 

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