Does super include life insurance cover?
If you have super fund, then the chances are you already have life insurance inside. Super funds that have been organised by employers are required to offer at least a minimum level of life cover. This is usually at a very competitive rate as the cover can be provided under one “group” policy which enables the employer to divide the risk across many people at once.
Key features of life cover through superannuation
- Death cover, TPD and Income Protection are generally available through your super fund.
- The premium is paid from funds that have accumulated. These premiums are generally tax-deductible.
- Some insurance companies allow you to apply for cover with them but continue to fund the cover from your superannuation by performing a superannuation rollover.
- Premiums are automatically deducted from your superannuation.
Read on to learn more about life insurance through super or enter your details in the form below to speak with an adviser about your current policy and potential options for funding your insurance through superannuation.
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How does superannuation life insurance work?
Life insurance policies through a super fund work differently to a standalone policy.
Who owns a policy?
If a policy is taken out through a super fund is technically owned by the super fund. The owner may be a named trustee who is able to pay out the benefits to listed beneficiaries.
Who receives payment in a claim?
Any benefit is first paid out to the super fund. Once certain conditions such as terminal illness or death are met, the funds can then be paid out to listed beneficiaries.
Can I nominate a beneficiary?
- Yes, you can personally nominate beneficiaries who will receive your insurance bewnefit payment.
There are two types of nominations:
- Binding. In a binding nomination, the trustee of the super fund must pay your benefit to the beneficiary you have nominated. The beneficiaries will be paid the amount in any proportion up to 100%. A binding nomination will expire after 3 years and becoming non-binding unless they are updated by you.
- Non-binding. A trustee will have the final say on a non-binding nomination and will take the beneficiary and will into account when deciding on a non-binding nomination. The trustee will have the final decision on the proportion of payment. Non-binding beneficiaries can include dependents not listed as binding beneficiaries. Non-binding beneficiaries do not have to be updated or renewed.
How do I pay for life insurance inside a super fund?
Premiums are paid from your super fund. This means a portion of your contributions to your super fund are taken to pay for premiums. Make sure you routinely check the amount of money you have in your super fund so that it doesn’t empty the account over time.
What types of superannuation funds offer life insurance?
1. Self-managed super funds
An self managed super fund (SMSF) is a super fund that where investments and life insurance choices are managed by a small group of trustees including yourself. Some key characteristics include:
- Greater control of investments
- Higher account keeping costs
2. Managed super funds
This is where your investments are managed by a large fund and life insurance policies are managed by a trustee in a super fund. Managed super funds that include life insurance can typically be:
- A retail super fund
- An industry super fund
- Setup by your life insurer
- Terminal Illness benefit. This will provide you with a lump sum payment if you are diagnosed with a terminal illness and given up to 12 months to live. The payout will be released from your super fund to your beneficiaries and can be used for medical bills, funeral arrangements or as income.
- Total permanent disablement insurance. It is possible to take out a TPD insurance policy through your super fund either as a standalone policy or in a combined policy.
- Income protection. Many life insurance brands will allow you take out income protection insurance policies through a super fund to be used if you cannot work for a period of time.
- Trauma insurance. Since 2014, it is no longer possible to take out trauma or critical illness insurance through your super fund.
Superannuation life insurance vs standalone life insurance
Here are the key differences between life insurance inside and outside of super.
| Compare | Inside super | Outside super |
|---|---|---|
| How are premiums paid? | Take from your super contribution | Directly by you |
| How are benefits paid? | First to the trustee, then to beneficiaries after conditions of release | To the named beneficiaries or dependents |
| Is automatically renewed? | Yes | You typically must inform your insurer |
| Are there volume discounts available? | Yes | No |
| Can my life insurance be tailored? | No | Yes |
How is life insurance through super taxed?
Life insurance inside super is different to cover outside of super when it comes to tax. Tax rules also will differ according to the specific type of life insurance.
| Life insurance | Income protection | TPD | ||
|---|---|---|---|---|
| Inside super | Premiums | Tax-deductible | Tax-deductible | Tax-deductible |
| Benefits | Tax free for dependant beneficiaries | Taxed | Taxed | |
| Outside super | Premiums | Not tax-deductible | Not tax-deductible | Not tax-deductible |
| Benefits | Tax-free (no matter who is the beneficiary) | Tax-free | Tax-free |
Benefits and drawbacks of life insurance through super
While taking out life insurance through super can be an affordable option, you need to make sure that you understand exactly how the features and benefits differ from a standard life insurance policy, and how you can make sure the coverage suits your needs. Of course, there are a number of benefits to getting life insurance through your super fund. These include:
The good
It is usually cheaper
The super fund is generally able to buy life insurance in bulk, and therefore negotiate a cheaper rate. It means that it can be an inexpensive way to purchase life insurance.
No medical required
As the insurance is usually taken out as a group policy through the super fund, individual medical checks aren’t required.
Tax benefits
The premiums which pay your life insurance come from your contributions, or those made by your employer to your super fund. Therefore, if you are self employed the premiums can be a tax deduction, and if your contributions are made as part of a salary sacrifice, then they are paid from your pre-tax income.
Abolition of Reasonable Benefit Limits (RBL)
Until July 2007 when the RBLs were abolished, life insurance benefits paid from a super fund could be included in an individual’s RBL, which could create tax issues for those people with a lot of super. However, these constraints are no longer an issue.
Most super funds include some level of life insurance cover
This means that even if you haven’t thought about taking out life insurance, you don’t think you need it, or you don’t know where to start, even if something happens to you in the process of choosing a life insurance policy, you are likely already covered to some extent through your super fund.
The not so good
The cover amount available may be less than you need
Because these are generic policies, the amount of life insurance through super is generally less than you would ideally need.
The benefit is paid to the super fund
This can mean that there is a delay from the time of your death to the time that your family receives the benefit amount from your life insurance policy.
You’re not in complete control of choosing your beneficiary
You will need to look at whether a life insurance policy through your super fund allows you to make a binding beneficiary nomination, otherwise you can’t ever be sure that the benefit payout will go to the people you’ve chosen. In many cases the trustee of the super fund has absolute discretion over who receives the death benefit, where all potential beneficiaries are required to come forward and express an interest in the benefit payout.
Tax requirements
There are more limitations on who can receive a tax free payout from a super fund life insurance benefit, and whose benefit will be taxed. For example, life insurance benefits from a super fund policy are generally only tax free if the beneficiary is a dependent such as a spouse, a child under 18, or anyone else who can be shown to have been financially dependent. When the benefit is paid to anyone who is not a dependent, the amount will be taxed at 16.5%. However, these tax rules do not apply to a life insurance policy which is held outside of a super fund.
How is life cover through a Self Managed Super Fund Different?
Recent years have seen an increase in popularity of life insurance through Superannuation funds whereby their SMSF trustee becomes the owner of the policy and is responsible for making the premium payments. In the event of a claim, the benefit is not paid to the policyholder but to the fund. The trustee will distribute the benefit payment to the policy beneficiaries.
How does life cover through self managed super funds work?
What are the advantages and disadvantages of SMSF Life Insurance?
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10 useful tips for life insurance and superannuation
- Take advantage of cost-effective insurance cover: When you choose to buy life insurance through superannuation, you should get the benefit that comes with group buying. Since your super fund is likely to be purchasing life insurance policies on behalf of a large group of people, insurance companies should offer competitive rates for the same, which help to make the cover more cost effective for you.
- Life insurance for Self Managed Super Funds: If you are in charge of a Self Managed Super Fund (SMSF), you need to ensure that buying life insurance through superannuation is a decision that is beneficial for every member of your fund, according to their specific situation. If the decision does not tie in with the investment strategy of the fund, you may have to rethink the decision.
- Put in place a binding nomination: A binding nomination ensures that your death benefit is paid to the trustee of your choice. If you do not nominate someone, the trustee will decide who the benefit is paid to.
- Tax liability for non-dependant beneficiaries: If the beneficiaries of your life insurance proceeds through super are people other than your spouse, your kids, or financially dependent persons, then they will have to pay tax on the money that they receive through your super fund. This is not so when life insurance is purchased outside super.
- Minimum levels of life insurance cover: Even if you have decided not to choose your own super fund, you should be aware that it is mandatory for your employer to contribute into a super fund and that the fund should provide you with a minimum level of life insurance cover. This can benefit those who do not have any other type of life insurance cover.
- Added cover for disability: Most super funds offer additional cover for disability when you choose to purchase life insurance through superannuation. If your super fund also works along the same principles, you can benefit from the added cover if you become disabled and cannot continue to work for a while.
- Automatic acceptance for life insurance cover: Most super funds offer their members an automatic acceptance for a specific level of life insurance cover. This means you do not have to prove your eligibility for the cover, nor do you have to undergo medical examinations for the same. This can be especially useful for people who have a difficult time getting insurance outside of super.
- No automatic acceptance for your own super fund: You can take advantage of automatic acceptance by opting to pay for life insurance through superannuation. However, you need to be aware that if you are choosing your own super fund, you may not be eligible for this benefit. This benefit is usually available to those people who opt to become part of a super fund that their employer has a special arrangement with.
- Added cover for income protection: Another advantage of purchasing life insurance through superannuation is that you can choose income protection as an ancillary cover within your core life insurance policy. This helps you to protect yourself and your loved ones from a loss of income arising from serious illnesses and disabilities.
- Fulfilling the conditions of release: This is a vital consideration if you are thinking of buying life insurance through superannuation. You should know that every super fund has certain conditions of release for benefit payouts. Only if those conditions of release are satisfied will your beneficiaries be eligible to receive any money from your super account. Therefore, if there is any ambiguity or doubt in your mind whether a certain circumstance will fulfil the conditions of release or not, you may want to consider buying life insurance outside superannuation.
Some final questions you might have
Do you need life insurance in addition to the coverage you get through your super fund?
In many cases, yes you do need additional coverage as the life insurance coverage amounts available through superannuation are generally lower than those offered by life insurance companies independently, and may not be enough to cover your expenses.
What types of insurance are available through superannuation?
Depending on your super fund provider, you can generally access life insurance (also known as death cover), total and permanent disability insurance (TPD), and income protection insurance (also known as salary continuance insurance).
What happens to your super fund life insurance when you die?
The trustee of the super fund will decide how the benefit amount is distributed.
How are beneficiaries nominated through super fund life insurance?
You can nominate your beneficiaries in any way you choose, but you will need to understand the terms and conditions of your super fund, to know when, how and if those nominations are valid.
What are the benefits of life insurance outside of superannuation?
While funding your life insurance through superannuation may be a more affordable option, there are some key benefits of funding cover outside super that may lead you away from this option:
- Increased level of cover: Less restrictions on sum-insured to be applied for and greater range of additional benefits.
- Straightforward claims and benefit payment process: Much more straightforward process for the payment of benefit in comparison to cover inside superannuation where it is first paid to the fund trustee.
- More cover options: More types of cover and greater selection of policies available outside of super. Trauma Insurance is not available through superannuation.
- Retirement funds are not reduced: You are not chipping away at the hard-earned retirement funds in your superannuation.
- Tax-free benefit payments: The benefit payments are tax-free regardless of the beneficiary it is paid to.
- Own Occupation: Own occupation definition of disability is only available for TPD insurance outside of superannuation.
Flexible linking: combine your life cover inside super with policies outside of superannuation
You can now link your existing life insurance in super with policies outside super, such as income protection, TPD and trauma cover, with a new feature called flexible linking. This feature enables policyholders greater flexibility in managing their life insurance policies inside and outside of super, without sacrificing the quality of cover that they require. Currently, flexible linking is only available through select providers.
Flexible policy options
There are a few options to make your policy more flexible.
- Bundling. One option is a combined policy where you can link multiple coverages, such as life and critical illness insurance, into one policy.
- Flexible policy linking. Another option is policy linking. Policy linking allows you to split your policy ownership between your super fund and individual ownership.
Internal: Tax rules for superannuation life insurance
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