As a lawyer, you’d be accustomed to presenting all the relevant facts when dealing with matters that could affect your clients’ futures. However, do you apply the same diligence when making decisions that could affect your own personal financial future?

Life insurance provides an important layer of financial protection for you and your loved ones, and one of the key decisions to make when taking out Life insurance is whether to hold policies independently, or through your superannuation fund. This superannuation fund may be an industry, retail or self-managed superannuation fund (SMSF).

A recent KPMG ‘Supertrends’ report calculated that in June 2014 small superannuation funds (including SMSFs) represented 34% of superannuation assets, retail funds 26% and industry funds 20%. Superannuation investment has continued to grow since the global financial crisis in 2008, with SMSFs and industry funds growing in popularity.  

But what does this mean for you?

When it comes to a Life insurance perspective, potentially a lot. There are both advantages and disadvantages to arranging your Life insurance exclusively through your superannuation fund, whether it has been set up through an SMSF vehicle or not. Here is some food for thought.

The disadvantages of holding Life insurance through super

The main disadvantages of arranging Life insurance through a superannuation fund include:

• The risk of insufficient cover.
  If you do have Life insurance in a Corporate or Industry Superannuation fund, you may be surprised with how basic the cover level is. It is often insufficient to adequately protect your family many years into the future.

• May not meet your needs.
  Life insurance within a superannuation fund is not tailored to or appropriate for an individual’s needs or circumstances, as they take a utilitarian approach where the overall needs of all the members as a collective are met, rather than specific individual needs.

• Depleted superannuation savings.
  As premiums are removed from your superannuation account, this could make a noticeable difference to your funds when you reach retirement.

• Control and speed of claims.
  There is less control over the claims process, as the policyholder is the Trustee of the relevant superannuation fund and not you directly. Further, the superannuation laws and the Superannuation fund rules can delay the processing and payment of claims. For example, if there is no binding nomination of beneficiaries then the superannuation fund is entitled to make its own determination as to the recipient of the funds.

• Taxation
  Death benefits from a superannuation fund paid to non-dependents are generally subject to taxation. It’s something that is not generally considered when people join a superannuation fund but reduces the amount of death benefit.

• Not all covers can be included in super
  Some types of Life insurance such as Trauma cover and feature-rich Income Protection (IP) cover cannot be included in superannuation. Generally only Life, Total and Permanent Disability (TPD) and basic Income Protection insurances are available through a superannuation vehicle.
  
  

The advantages of holding Life insurance through a super fund

There are a number of advantages in owning Life insurance through a superannuation fund. These include:

• Default cover
  Many superannuation funds provide automatic Life insurance cover when the account is first set up. Because underwriting is generally not required up to the automatic cover limits, fewer questions are asked before the cover is arranged and the process is simple. While this cover is unlikely to provide for all of your Life insurance needs, receiving some level of payment, even if limited, is better than no payout at all.

• Competitive premiums
  The premiums may be more competitively priced than if the cover were arranged individually, as the Life insurer providing the cover may include a discount due to this being a group insurance arrangement. According to Super Guide, a larger superannuation fund may provide a more competitive Life insurance deal for the members of these funds. As a recent ABC report highlighted, Life insurance outside superannuation may therefore be more expensive for some people. Having Life insurance cover within superannuation could be more convenient and less expensive depending on individual circumstances.

• No impact on day to day expenses
  As premiums are deducted automatically from the superannuation account balance, there are no ongoing and personal out-of-pocket expenses which could impact on the monthly household budget.
  
  

Taxation implications in holding Life insurance inside or outside a superannuation fund within super:

• Life insurance
  The premiums paid for Life insurance are generally tax deductible to the Trustees of the superannuation fund. Any benefits paid to a dependent are generally not taxable in the event of a claim however payments to non-dependents could be subject to tax. The ATO publication ‘Super death benefits’ provides a guide to the taxation of a death benefit in various circumstances.  

• TPD
  The premiums paid for Total and Permanent Disability (TPD) insurance are also tax deductible to the Trustees of the superannuation fund. Any TPD benefits paid from a super fund are generally subject to concessional tax treatment. The ATO publication ‘Access due to permanent incapacity’ provides information how you may be able to access your super if you are permanently incapacitated.

• Income Protection
  Income Protection (IP) premiums are also generally tax deductible to the trustee and any monthly benefits paid are tax assessable in the recipient’s hands as they are deemed to be income.
  
  

NobleOak recommends that professional taxation advice is obtained if there are any questions about the individual taxation position on any Life insurance benefits held within superannuation compared to outside superannuation.

Outside super:

• Life insurance premiums are generally not tax deductible and all benefits payable are tax free, regardless of the beneficiary.

• Similarly, Total and Permanent Disability insurance (TPD) premiums are not generally tax deductible and all benefits payable are tax free, regardless of the beneficiary.

• Income Protection (IP) premiums can be tax deductible and any monthly benefits paid would be assessable for taxation.
   

Underinsurance and the rise of the self managed superannuation fund (SMSF)

People who run SMSFs are required to consider the Life insurance requirements of each member covered by the fund, even if the member doesn’t take up the cover.

Individual Life insurance needs should be fully considered based on personal circumstances. For instance cover under the SMSF for the member’s remaining family may still require substantial cover based on the current mortgage and other financial commitments.

According to the ‘Underinsurance in Australia Report 2014’ prepared by Rice Warner, there is an Australia-wide underinsurance gap of $1.8 trillion for Life insurance and an even greater $4.5 trillion gap for Income Protection cover. This represents the difference between the amount existing covers would pay out compared to the amount actually required by the Life insured in the event of a claim occurring.

If you have an SMSF or are about to start one, and being aware of the SMSF rules about considering insurance and the wide underinsurance gap, it would be prudent to contact a Life insurer such as NobleOak who is in a position to provide Life insurance which that meets the SMSF regulatory requirements, and which can be tailored to your needs.

The need for Life insurance

The implications of having appropriate Life insurance in place are very obvious. In the event of your unexpected or sudden death, your loved ones will be financially protected.

So the need for adequate Life insurance is clear. You just need to consider the advantages and disadvantages of getting it through your superannuation fund, SMSF or outside superannuation altogether.

Key takeaways:

• Corporate or Industry Superannuation funds do provide automatic cover, but could still leave you underinsured.
  
  
• Members generally have less control over Life insurance cover held within a Corporate or Industry Superannuation fund whereas cover outside of these funds (whether through a self managed superannuation fund or outside of superannuation) can be tailored to suit the individual’s needs.
  
  
• Some types of Life insurance, such as Trauma cover, cannot be included in a superannuation fund.
  
  
• Some Life insurance claims payable from inside superannuation funds can be taxable depending on who receives the payment. Generally Life insurance benefits held outside of superannuation are tax free in the event of a claim arising.

Sources:

KPMG 2015, ‘Supertrends: The trends shaping Australia's superannuation industry’, KPMG, viewed 02 December 2015

Power T, 2015, ‘Life Insurance and Super: 10 Things you Should Know’, Super Guide, 7 October, viewed 02 December 2015

Robertson, A 2015, ‘Life Insurance inside superannuation: Beware of the hidden dangers’, Abc.net.au, 6 March, viewed 02 December

2015, ‘Rice Warner releases Underinsurance in Australia Report 2014’, Professional Planner blog, 13 July, viewed 02 December 2015

Important Note

The information contained in this article is of a general nature only and does not take into consideration your objectives, financial situation or needs. Readers should consider this information having regard to your objectives, financial situation and needs. The information about taxation is general information only and is based on the continuation of present taxation laws and their interpretation.

NobleOak Life Limited ABN 85 087 648 708 AFS Licence AFSL 247302 Level 4, 89 York Street Sydney NSW 2000.