Life, income protection and total and permanent disability (TPD) insurance policies often come bundled within your superannuation account. In fact, the Investment and Financial Services Association has estimated that 70% of life insurance policies in Australia are purchased through superannuation funds. Purchasing your life insurance through superannuation can be cheaper and easier than taking out a standalone insurance policy, but there are other considerations as well. So what do you need to know?
How are super fund members covered?
When you join a superannuation fund you will usually be offered a default level of insurance. You can opt out or apply for a higher level of cover. Generally, if you accept the default cover you won’t be required to undergo any medical tests or go through a detailed underwriting process. If you opt to increase your cover you may have to undergo medical tests and a detailed underwriting process.
When you have insurance cover through your super you will be charged premiums that are periodically withdrawn from your super account.
What types of insurance can I get through my super fund?
How do I get insurance through my super?
To be eligible for insurance through your super, applicants need to satisfy the following conditions:
The benefits of taking out an insurance policy through your super fund
Insurance through your super fund is a good option for those who happy with the insurance coverage that is offered and may not have the disposable income to make payments outside of super. The insurance inside super may give you peace of mind with the knowledge it is there if you need it. Typically, people will often take out an insurance policy after purchasing a house, having children or getting married. In these instances, when reviewing your insurances part of this can be working out whether your existing cover is sufficient or you will be better off purchasing a more comprehensive standalone policy directly from an insurer.
The drawbacks of taking out an insurance policy through your super fund
One of the most obvious disadvantages of having your insurance inside your super is that the premiums will be deducted from your superannuation balance. This means you will have less money to retire on.
When you make a claim the insurance proceeds need to go to the super fund before they are passed on to you. The Trustee of the super fund has to be satisfied with the beneficiary and as a result, there can sometimes be a delay in the payout of death benefits. Income Protection and TPD tend to be more straightforward and take less time.
There can also be some more technical issues arise. For example, if you haven’t nominated a beneficiary of your super or you haven’t made a binding beneficiary nomination the Trustee of your super fund has some discretion about who your insurance proceeds might be paid to. Also, you need to make sure that the proceeds of your insurance claim can actually be paid out of the super fund because you have met a ‘condition of release’. This will usually be the case for insurance proceeds paid in the event of death, a terminal medical condition, permanent incapacity or temporary incapacity.
So, which is better?
At the end of the day, you need to decide what’s best for your particular situation. You should think about your income, your dependents and what they need and your general financial situation and determine what would suit you best. If you need help deciding you should seek advice from a licensed financial adviser.
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This summary has been prepared by MoneyBrilliant Pty Ltd (AFSL 492711, ACL 493068). The information in this summary is of a factual nature only. We are not suggesting or recommending that you take any particular course of action in relation to any financial product or service. It does not take into account your personal circumstances or objectives. If you need financial advice you should seek advice from a licensed financial adviser.