In or out: when should insurance be held through super?

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Most investors understand the importance of personal insurances to protect their families. In some cases, insuring through a superannuation fund can maximise the effectiveness of policies, says Glenn Roberts of HLB Mann Judd Brisbane.

Roberts says holding personal insurance cover through a superannuation fund has a number of advantages:

-    Premiums can be cheaper due to the bulk discounts available to superannuation funds.
-    Many funds provide automatic basic cover without the need for medical questionnaires or assessments.
-    It can be more tax-effective, as premiums are paid from the superannuation account with pre-tax dollars, rather than from the member’s after tax dollars.
-    Paying insurance premiums automatically from the superannuation account means there is no impact on household cash flows.

But there is a downside to be considered as well, he says. The potential disadvantages of your clients holding insurance through their superannuation fund are as follows:

-    The limited level of cover available may not fully protect their family.
-    Some types of cover may only protect them for a short time in the event of a payout.
-    If they have multiple superannuation funds, they may be paying for more cover than they require by being insured within every fund.
-    If they change employers or superannuation funds, their insurance cover may lapse.
-    Their insurance cover may automatically decrease/cease as they get older/reach a certain age.
-    Insurance payouts may be delayed, as benefits are paid first to the superannuation trustee, who then distributes them to beneficiaries.

Life insurance: 

Term life insurance pays a lump sum on the death of the person insured; this type of insurance works well inside superannuation, says Roberts. Many funds offer a default level of cover that can be altered to suit needs. 

There is an important difference compared with premiums and benefits paid in the non-superannuation environment, he says.

While premiums paid outside superannuation are not tax-deductible, benefits are paid out tax-free. Inside superannuation, premiums are tax-deductible, but benefits are tax-free only when paid to dependants.

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