When considering whether to keep your insurance within super or outside super, it is crucial to make an informed decision. Therefore, it is advisable to consult with SMSF accountants before obtaining a new policy or evaluating an existing one.
3 types of insurance coverage can be held inside the super:
- Life insurance
- Total and permanent disability (TPD) insurance – “any” occupation only
- Income protection insurance
Trauma insurance is not permitted to be held inside the 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 coverage, especially by the significant super funds, the premiums may be cheaper than if the same policy was held outside of 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, they may be 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
- The flexibility of cover: TPD “own” occupation is available, and income protection policies have a more extended payment period
- Cash flow: detrimental as premiums are paid with post-tax dollars
To clarify the information above, Total and Permanent Disability (TPD) cover provides insurance that pays a lump sum if you cannot work due to total or permanent disability from an 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 being able to return to occupations similar to your current occupation.
As usual, if you are considering taking up insurance, speak with us first to determine what is best for your circumstances.
*Correct as of November 2015
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
