Should you hold personal insurance inside or outside your superannuation fund?

Personal insurance is a smart way to protect your quality of life and provide for yourself and your family if you get sick or injured. When arranging personal insurance, it’s important to decide what type of insurance you’ll need for your circumstances and ensure you have sufficient cover.

It’s also important to be smart about the structure of your insurance so the dollars you pay for premiums work harder for you. This includes decisions on whether to hold these inside or outside of your superannuation fund.

All insurances can be held outside superannuation, but only three can be held inside your superannuation.

• Income protection: provides regular payments to replace your income, should you be unable to work, due to illness or injury.
   
• Life insurance: provides a lump sum payment to your nominated beneficiaries in the event of your death.
   
• Total permanent disablement cover: provides a lump sum payment if you are no longer able to work due to permanent illness or injury.
   

Deciding whether to have your insurance within your superannuation or outside, can be a complex decision. To help you decide, we have listed the pros and cons of each.

Holding personal insurance inside your superannuation

Only income protection, total and permanent disablement (TPD) and life insurance are available through most superannuation funds. It’s essential to ensure these types of personal insurances are sufficient for your needs and cover the unique risks your vocation presents.

Advantages

• Life and TPD insurance are generally not tax deductible if held outside of superannuation. By holding this cover in your superannuation fund, you can take advantage of superannuation rules which may provide you with tax benefits.
   
• Many industry and employer super funds have group insurance policies available which can be cost effective.
   
• It’s easy to manage because premiums are automatically deducted from your super balance.
   
• Some super funds have automatic acceptance up to certain amounts, with no need for a medical history check.

Disadvantages

• Reduces your superannuation balance — as premiums are paid from your superannuation savings, your superannuation balance will reduce by the premium paid each year and could reduce the balance available for your retirement.
   
• It’s not always portable — if you have insurance inside your superannuation and change superannuation funds, your cover may not always move with you or remain with the same amount or conditions. If this is the case, you may have to apply for new insurance. Applying for new cover means a new insurer may look at your health history and you may not be covered, or it may cost more.
   
• Death benefits may be taxed, depending on who the benefit is paid to.
   
• You may pay tax on a TPD claim payment when your insurance is held through your superannuation.
   
• Limited cover — the types of insurance and level of cover are limited so they may not be tailored to your needs as a doctor. Cover definitions may also not be as flexible or lenient as those available for cover held outside of superannuation, particularly for TPD and income protection cover.
   
• If you cannot work in your specialty because of illness or injury but can work in another specialty, you may find you are not covered due to the occupation definitions for the fund.
   
• Slower to pay out on claims — there can be delays in receiving benefits for death cover as the insurer pays the benefit to the fund first and then distributes it to beneficiaries.
   
• If you do not make a binding beneficiary nomination or your fund does not offer binding nominations, the superannuation trustee will decide who gets your benefits when you die, but your nomination will be taken into consideration.
   
• Life insurance cover through your superannuation ends when you reach a certain age (usually 65 or 70), while policies outside of your superannuation may cover you for longer.
   
• Trauma and practice expense cover is not available through superannuation.
   
• Different conditions of release — superannuation fund trustees decide on the terms of release of a superannuation benefit. Sometimes these terms are more stringent than those from a life insurance company, meaning a benefit may not be paid by the superannuation fund that may have been paid by the life company.
   
• When policies are held within superannuation, the option of paying your premiums on a steady level premium structure is usually not available.
   
• The option of linking together different types of cover, which insurance providers may offer multi-policy discounts on premiums for, may not be available.

Insuring outside of your superannuation

All personal insurances are available outside superannuation including income protection, life, TPD, trauma and practice expense cover.

Advantages

• Portability — you can continue to keep your cover without having to apply for new cover when you change employers, superannuation fund or start your own practice.
   
• Income protection premiums are tax deductible.
   
• You may receive your benefits faster as any benefits are paid directly to the policy owner.
   
• Life and TPD insurance benefits are not taxed.
   
• You can insure for your area of specialty as a doctor so you won’t be forced to take on other jobs if you can’t work in your chosen specialty.

Disadvantages

• Premiums are paid with post tax dollars for Life and TPD insurance.
   
• Your cover may cost you more as there is no group discount option.

A simple example

Dr Smith has an income of $150,000 per annum. He is 40 years old, in good health and a non-smoker. He wants to protect his income in case of sickness or an accident.

For his income protection policy, which would pay 75% of his pre-injury income, Dr Smith would like a 30-day waiting period, with a benefit period of 2 years.

If Dr Smith pays for this policy outside of his superannuation fund, he would pay $167.48 per month, and it would be tax deductible to him. He would need to factor in the impact on his personal cashflow and ensure it is affordable to him.

If he pays for this policy inside his superannuation fund, using the same insurer as an example, the premium would be the same $167.48, and would be tax deductible to the super fund at the tax rates that apply to them — usually no more than 15%. Because the premiums are paid for by the super fund, Dr Smith doesn’t have to worry about whether it is personally affordable but does need to consider the impact on his long-term super balance.
 

We work exclusively with doctors There is no simple answer as to whether you should hold insurance inside or outside of your superannuation. In fact, you may be better off with a mixture of both. Our life insurance advisers can help you decide the right balance for your circumstances as a doctor. Whether you need help understanding the insurance options available, have a question regarding a cover or a complex circumstance that requires professional analysis and detailed personal advice, we can help. Our life insurance advisers can ensure you are not paying for what you don’t need but are covered for everything you do need.

 

For more information, please contact Avant Life Insurance.

Disclaimer:

‘Avant Life Insurance’ is a registered business name of Doctors Financial Services Pty Limited ABN 56 610 510 328 (DFS), a wholly owned subsidiary of Avant Mutual Group Limited ABN 58 123 154 898 (Avant). DFS is authorised to provide general advice and personal advice under Australian Financial Services Licence Number 487758 (AFSL).

The information provided in this brochure is meant to convey factual information that could be interpreted as general advice in some cases. General advice is product advice that has not considered a person’s objectives, financial situation or needs. Accordingly, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs before deciding to purchase, terminate, change or continue any life insurance policy, superannuation fund or other product that you may hold with any provider. Alternatively, you should consider if you need personal advice that considers your objectives, financial situation or needs, including assessing the suitability of any existing life insurance policies you may hold.

Please contact us on 1800 128 268 if you need personal advice or if you would like more information about our factual comparison and implementation service (LIST) or visit our website for the full details of life insurance products that we distribute, including the terms, conditions, and exclusions that apply. Please read and consider the relevant policy wording and PDS before applying.

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