Securing insurance through your super
Tuesday, 13 July 2010
WHEN life throws you a curve ball, the last thing you want to worry about is financial security. That is why life insurance plays a huge role in keeping you on track when the road gets a little bumpy.
WHEN life throws you a curve ball, the last thing you want to worry about is financial security. That is why life insurance plays a huge role in keeping you on track when the road gets a little bumpy.
People insure cars and homes, but often forget themselves.
Insurance needs to evolve with you through your different life cycles, so it’s important to check your cover from time to time to ensure it still meets your needs.
For example, you should always check your cover when you start a new job, open a new superannuation account and as you prepare for retirement.
You may already have some life insurance cover through your superannuation, but is it enough to protect you and your family from the unexpected?
When establishing how much you need, ask yourself these questions:
Could you and your family manage financially if your income no longer existed?
Do you have regular loan repayments to meet?
Do you have or are you planning on having children?
Do you have people who are financially dependent on you?
The reality is most Australians are underinsured. Very underinsured.
According to the Lifewise/NATSEM Underinsurance Report published early this year, 95% of families don’t have adequate coverage.
In fact, the report predicts one in five Australian parents will be unable to work, or will die, before retirement age.
There are three different types of life insurance – income protection, death, and total and permanent disablement (TPD).
Income protection pays you an income (usually around 80-100% of your actual income) up to a certain amount of time in the event that you’re unable to work due to long-term injury or illness.
Income protection payments are taxed and offset by any other related benefit you may receive like WorkCover.
Death cover helps to protect you and your family by providing a lump sum payment in the event of your death, or if you are diagnosed with a terminal illness.
TPD cover provides a lump sum payment in the event of your total and permanent disablement.
You can purchase these products from an insurer, broker or financial adviser. But most Australians, around 70% according to Australian Superannuation Funds of Australia, hold life insurance policies through superannuation funds.
Often this cover is automatically provided on joining a superannuation fund – you should check with your fund to see what level of cover you may have and whether this is enough for you now and in the future.
There are a number of benefits to organising your insurance through your superannuation.
Value for money
If you’re with a large industry or retail super fund, then their size means they can buy in bulk and negotiate lower rates with their insurer.
Amounts paid and terms may also be more generous than if you were going in alone.
Tax concessions
When you buy insurance through your super fund you are using pre-tax dollars, as superannuation guarantee contributions and any salary sacrificing can be used. This is often cheaper than paying for insurance outside of your superannuation.
However, insurance premiums are tax deductible to an individual. Depending on your income, this may be the right option for you.
Additionally, superannuation funds are able to offset insurance premiums against their tax and this may mean the tax deduction is passed onto you.
If you use non-concessional contributions (ie. after tax) to pay your premiums, and your income is below the threshold, you may be eligible to receive the government co-contribution.
When insurance is provided through super, your dependents can also receive tax-free lump sum benefits.
Cash flow
Because the cost of your insurance is deducted from your account and not from your pay, as with private insurance, you are left with more disposable income.
Free pass on your medical
Many super funds automatically provide members with basic insurance cover without the need for completing a medical check, on joining the fund.
Taking life insurance cover through your super fund is usually cost-effective, but it is important to ensure the cover suits your needs and there are certainly a few things to look out for as well.
Firstly, if you join a fund as an individual and not through an employer, you don’t automatically receive basic coverage and may need to provide medical information and/or undertake a medical check.
Although there are certainly strong tax advantages of paying for premiums through your superannuation, you also need to make sure you don’t eat into too much of your savings.
Think about supplementing your superannuation guarantee contributions to ensure your retirement savings remain on track, while the insurance provides you with protection now, in your income-generating years.
Make sure you nominate your beneficiaries to ensure your money goes to the right people and are exempt from significant tax implications.
For examples, any non-dependents are subject to a hefty tax bill, but payouts to dependents are tax-free.
So if you’re looking for an easy and tax-effective way to insure you and your family, your superannuation fund could be a great place to start.
It would be a good idea to call your superannuation fund. A lot of funds can provide personal advice about the appropriate level of cover you need and usually free of charge.
Robyn Petrou
ESI Super CEO
Where to find out more
For more information on securing insurance through your superannuation, please contact ESI Super on 1300 363 240.
This information has been prepared for the general information of readers. It does not take into account individual financial objectives, financial situation or needs. Any information or advice included in this article is provided by ESI Financial Services Pty Ltd (ABN 93 101 428 782 AFSL 224952). ESI Financial Services Pty Ltd is a wholly owned subsidiary of Electricity Supply Industry Superannuation (Qld) Ltd (ABN 30 069 634 439 AFSL 336567) the Trustee of Electricity Supply Industry Superannuation Fund (ABN 33 761 363 685).
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