Holding certain types of Life Insurance within Superannuation is prudent practice. For some people, this is the only personal risk protection they have. The superannuation system regulations restrict the types of insurance allowed within this structure. The most common life insurance carried within superannuation, are –
- ‘term life’;
- TPD; and
- income protection insurance.
Should I use my superannuation account to own my Life (Death) insurance policy?
Our article ‘Life Insurance and Superannuation linked’ discusses in more detail which insurance products to take through a superannuation account. We discuss some limitations to holding insurance within superannuation under the Superannuation Industry Supervision (SIS) legislation in that article.
A number of clients have raised questions from that article as to –
- the benefits – and the pitfalls – of
- holding life insurance within superannuation
- so as to protect their dependants from financial risks and obligations should they die ‘prematurely’.
The Pro’s and Con’s of owning life insurance within superannuation accounts –
The Pro’s (benefits/ advantages) –
When insuring through a group superannuation account, cover may be provided on an ‘auto acceptance’ basis. Initial premiums will be at ‘standard rates’. (Standard rates mean that there won’t be any loading for Smoker status/ health issues). (Group super accounts are available through employer, or industry fund usually.) (Auto acceptance precludes the need for some personal statements or medical reports.)
Trustees deduct insurance premiums payments from individual superannuation account balances. This helps maintain your personal cashflow for other matters.
Grouped superannuation accounts incur lower insurance premium costs. The lower cost reflects the considerable business secured by the insurer from that source. (Grouped super accounts include industry funds, employer groups, and some superannuation ‘platforms’.)
Self-managed superannuation funds invested in direct real property strategically use insurance –
- to protect the assets of the fund for the contingency of the untimely death of one of the members –
- particularly of a member with a disproportionately high account balance; and
- they do this whether or not the property is subject to borrowings external to the fund.
…and the Con’s (costs/ disadvantages) –
The benefits, terms and conditions of the policies issued under ‘auto acceptance’ terms may not satisfy your particular, personal needs. Unexpected exclusions can emerge during claims made under these policies. (Our linked article shares that ‘direct insurance’ purchased online or by phone shares this exclusion risk.)
Trustees deduct insurance premiums payments from individual superannuation account balances. They erode the accumulating balance of –
- contributions made to the account, and
- the investment returns to the account.
Additional superannuation contributions calculated to offset this effect are beneficial in that regard. The contribution caps imposed under legislation may limit such contributions.
Insurance policies held under employer group funds or industry funds are apt to expire. Expiry occurs after extended non-receipt of contributions from the employer with whom the account was initiated. After leaving an employer group insurance premiums are charged at a higher rate. This increase can be significant, in some cases declaring you as a Smoker for premium calculation purposes.(This can be rectified in appropriate circumstances and you should seek advice on the matter.)
Who owns the insurance?
Trustees of SMSFs should carefully consider the ownership and beneficiary nominations on policies. Where they are taken for the purpose of ‘balancing up’ account death benefit payouts, they need to –
- avoid unintended taxation consequences, and
- superannuation benefit induced liquidity issues,
at what is already a difficult time.
Taxation implications exist for death benefits paid to beneficiaries who are not tax dependants. The implications can be substantial. This situation is avoidable. Advice and planning are able to mitigate the consequences.
Insurance cover within superannuation accounts is not usually available to be held beyond age 70. (By contrast, a life policy outside of superannuation will usually be able to be held until age 99.) If at any time an insurance-owning superannuation account converts to pension mode the insurance cover will cease. (Alternative arrangements may be available through another account.) (Appropriate advice in these situations should overcome the impediment.)
…and beyond the Pro’s and Con’s,
A helpful tip from the team at MoneySmart –
‘The key to deciding if you want insurance through your super fund is knowing how much cover you need and whether your super fund will offer the full amount. Being insured through super is generally a cost-effective and easy option. Just remember that if you change funds your insurance cover may stop.’
(MoneySmart is the ASIC-sponsored website providing tips on various aspects of managing personal financial matters.)
Trusted advice about insurance and superannuation –
Insurance and Superannuation are elements of the wealth management needs of those having attained working age. Most financial aspects of our lives, raise questions – and as with Super and Insurance – there will be more than one answer to them. Personal circumstances have a direct impact on what the best answer to your particular questions or concerns might be.
The professional team at Continuum Financial Planners work to the mantra that –
- ‘we listen, we understand; and we have solutions’, that we deliver
- in personalised, professional wealth management advice.
For more about our personal risk (life insurance) service offering, refer to our Risk Insurance Services Page on this website.
Arranging an appointment with one of our team will ensure that your best interests are served in these matters. Do so –
- by phoning our office on 07-34213456, or
- at your convenience, use the linked Book A Meeting facility.
(This article was first posted by us in November 2014. It has occasionally been refreshed/ updated, most recently in February 2025.)
