Budget may spur trend to run life insurance through super

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The higher pressure on household budgets felt as a result of the new Federal Budget may incite a growing trend of people who choose to hold their life insurance within superannuation, says an expert.

Richard Dunkerley, Zurich’s head of marketing, life and investments, spoke to Wealth Professional about the potential impacts the “tough” budget could have on the life insurance arena.

 “The big take out of all things together is that cash flow and discretionary income of all households will be affected in some way shape of form,” he said.

These pressures will stem from a number of the changes to budget that will affect day-to-day living, including increases to Medicare payments, the re-introduction of the fuel excise indexation, and the three-year Temporary Budget Repair Levy for high income earners.

As a result, many Australians will be looking for ways to cut back their expenditure, and this may extend to people’s insurance choices, said Dunkerley.

“We know that overall insurance is considered a grudge purchase. People will be looking at their insurance portfolios and saying, ‘how can I rejig this?’” he said.

Because of this, consumers are at risk of making decisions that may alleviate pressure in the medium term, but have drastic future consequences.

There are possibilities that people may drop life insurance cover altogether or look towards swapping their current policy for a cheaper one.

But this could prove very costly, said Dunkerley, pointing to the recent case where a consumer cancelled his long-standing life insurance policy in favour of a less expensive one, and was then tragically diagnosed with terminal cancer.

He found he was not eligible for a pay-out due to a non-disclosure clause in the new policy, which he would have been covered for in the old one.

“Certainly if you’re making decisions without a bit of expert help you run the risk of making a decision that will have adverse consequences in the long run,” said Dunkerley.

He sees another throw-back of the budget as a trend towards people running their risk insurance through their superannuation.

This effectively means that premiums will be paid for through the balance of the fund, and not out of the personal pocket of the consumer.

One of the ways to do this would be to pay for these premiums with the rollover balance. It’s also possible to pay via salary sacrifice, the Superannuation Guarantee contribution, government co-contributions, and personal contributions.

However this is done, it will lower the balance of the superannuation account over time, but it may be a good option for those with strong super balances yet high costs of living, Dunkerley said.

“I could instantly be $400 better off in my pocket, but ultimately I’m still paying for it,” he said. “I think it’s quite common at the moment and it will become increasingly so. Depending on the circumstances and stage of life it can be the right thing to do. Having said that it’s not without consequences in that it diminishes your savings balance – but if the alternative is to have no cover whatsoever, it’s absolutely superior.”
Running life insurance through a superannuation account also means no access to benefits such trauma cover, so in many cases having a mixture of life insurance inside and outside of super can be a good option, said Dunkerley.

On the flipside of the coin, the Federal Budget could prove to be a positive for the life insurance industry.

During the GFC there was strong evidence that a significant amount of people were taking out all types of life insurance because they felt vulnerable and wanted to protect what they did have.

“What I don’t know is if right now people will view this as the same thing. I think this is slightly different in that household incomes are being affected but it’s not through job losses or people losing money through the share market,” said Dunkerley. “But I do think advisers are going to be busy because people are looking for help.”

He said all of the possible implications provide a good opportunity for advisers to “step up to the plate” and leverage the guidance that will be required.

This will include reinforcing the value of cover, explaining the role played by different types of insurance, looking for ways to restructure policies perhaps by changing payment frequencies and dropping non-core options, and giving advice around cash flow and managing household budgets.

“In the case that cover does need to be reduced, an adviser can ensure this is done in a way that best suits the circumstances of the individual,” said Dunkerley. “This could include taking advantage of a premium holiday facility offered by many insurers, which allows customers to suspend their cover then reactivate it down the track without needing to go through the full application process again.”