We have all heard about the importance of having sufficient life insurance but can you hold life insurance through super?
Why Have Life Insurance?
Ideally we want to work hard and save diligently during our working lives, such that we can build a nest egg that will be able to provide an income when we stop working (retire). The sooner you can build your nest egg, the sooner you can retire.
Sometimes events that are totally out of our control can throw our plans of course, and one of the biggest events is an illness or injury which affects your ability to earn an income and provide for your family.
To cover the risk of adverse events affecting our ability to earn an income there are the following life insurance covers:
- Death insurance (to provide for your family in the event of unexpected death)
- TPD insurance (to provide a lump sum payment in the event you become totally and permanently disabled and cannot return to work in any capacity)
- Trauma insurance (to provide a lump sum in the event you suffer a certain sickness or injury)
- Income protection insurance (to provide an ongoing income in the event you cannot work for a period due to illness or injury)
Life insurance provides some cover in the event that your financial plans are derailed due to sickness or injury.
Why Have Super?
If you work in Australia then you need to have a super fund.
Your employer is legally obliged to pay part of your salary into superannuation.
The maximum tax rate in super is 15%, so it is a cost effective place to accumulate savings for the long term.
Superannuation is like a forced savings nest egg for your retirement.
Why Hold Insurance Through Super?
There are two main reasons why people hold life insurance through super:
- Because they don’t want to pay life insurance premiums out of their own pocket
- Because it may be more tax effective to hold life insurance through super.
|Insurance premiums are paid automatically from super, rather than from your own pocket||The base amount of life insurance cover offered might not be sufficient for you|
|Most super funds offer a standard level of insurance cover with minimal medical checks||You cannot access trauma insurance or ’own occupation’ TPD in super|
|Some insurance policies through super may be cheaper||You need to ensure your binding death benefit nomination is current to ensure insurance proceeds are paid according to your wishes|
|There may be a tax benefit in paying for insurance premiums via a salary sacrifice arrangement.||There are tax implications for TPD and death benefits paid through superannuation|
|Applying for default insurances through super is generally easier than going direct||The default amount of life insurance offered through super tends to decrease with your age|
You Can’t Touch Your Super Until You Retire
In order to let your investments work as hard as possible for retirement, you are not allowed to access your super fund until you retire, or satisfy a condition of release.
Conditions of Release
The most common conditions of release occurs when you reach retirement age (preservation age).
There are some special circumstances where your super benets can be accessed before the preservation age, such as:
Insurances You Cannot Hold in Super
Due to the risk that your insurance policy pays out, but you cannot access the proceeds due to the superannuation conditions of release restrictions there are some insurances that you cannot hold in super.
- Trauma insurance (critical illness insurance)
- TPD insurance with ”own occupation” definition
Minimum Amount of Insurance Now Required in Super
As part of the Strong Super reforms introduced by the Australian Government from 2011, default superannuation funds (MySuper) are now required to provide a minimum level of life insurance through super to members based on their age.
Example: SunSuper Minimum Insurance for New Members
Is That The Right Amount of Insurance?
In November 2013, independent research house Rice Warner crunched the numbers on average amounts of insurance cover for Australian families and came up with the following recommendation:
How Much Life Insurance Do You Need?
Your financial commitments tend to follow your life circumstances.
CHART: The Life Insurance – Life Cycle
Calculating Your Life Insurance Cover Amount in Super
There is no hard and fast rule when calculating though amount of life insurance to hold through your super fund.
Here are some factors to consider.
If you need to work to generate an income, then you need income protection.
Remember you can only cover up to 75% of your current salary with income protection, but this is much better than having nothing at all.
There are also a range of variables in income protection cover from waiting period, to length of payment.
Calculating an amount TPD is a little harder.
TPD is designed to provide a lump sum if you can no longer work, hence you should picture exactly what this would mean to your financial life.
The amount of TPD should be considered with regard to your income protection cover and trauma cover.
Considering the definitions of TPD, it is highly likely that income protection and trauma would be triggered.
Calculating an amount of life cover is even harder still.
Life cover will pay a lump sum to your dependents in the event of your untimely death.
What financial position would your family be in if you were no longer providing a regular income?
- Life insurance can provide some protection against unexpected illness, injury or death.
- Life insurance can be held though your superannuation fund.
- There is no hard and fast rule as to the amount of insurance you should have.
- Consider your current circumstances and financial goals and get insurance cover to match
- Don’t rely on the default life insurance amount through super alone.
Not all insurance policies are the same. Make sure you read the documentation before you sign on the dotted line.
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.