There are three types of insurance policies possible to run through super: life cover, TPD (total and permanent disability), and income protection cover. Due to recent changes in the last few years, trauma insurance and also own occupation TPD are no longer able to be obtained through super.
There are plusses and minuses with having your insurance paid within a super fund versus having it outside a super fund, and then there is also the extra element of what’s known as super-link to consider—which allows you to link a policy within super to a policy outside of super.
Types of insurance in super
Historically, the main type of product offered through superannuation has been group cover. This is a default cover that superannuation funds typically provide and can be limited in terms of cover amounts and policy options but has typically been cheaper than retail policies. Over the past decade, it has become increasingly popular for retail insurance products to be purchased through super. These products allow for greater flexibility, higher claim payout rates and a wider variety of coverage options. At SMFS Insurance Partners we specialise in retail policies utilising Australia’s major insurance providers.
Tax benefits inside of superannuation
Firstly, just focusing on the tax concession side which is an important consideration for many people. Life insurance and TPD taken out through super attract a 15% tax benefit, there are no tax benefits if taken outside of super. Additionally, income protection taken out through super is 15% tax deductable. However, income protection is generally claimable at your marginal tax rate if taken outside of super. Based on 2021 tax rates, for those earning more than $18,201 the tax benefit is generally better for income protection outside of super.
Typically, when a life insurance policy is paid out to a dependent there are no tax implications on that payout, however, TPD if withdrawn from super is subject to withdrawal taxes when withdrawn prior to the preservation age. The rate of tax varies according to a complex formula which considers years to retirement and typically varies from 1 to 18 per cent. Income protection payments, once released to you, are treated as assessable income irrespective of whether you took the policy out, inside or outside of super.
Saving cash flow paid through super
Additionally, paying for your insurance through your super fund does mean you are using pre -tax dollars to pay it. A positive of this is that it can free up your normal disposable income to be used for other purposes. With life insurance within super, you may find that your insurance premiums are lower, but you may also find that the benefits paid may also be lower, and that you can’t source the same variety of policies you find outside of super. And of course, you if you have life insurance within super, you will need to make what’s known as a valid binding nomination, to say who any payout goes to.
The Super-link option
But it’s not just as simple as making a choice between having your life insurance within or outside of a super fund. There’s also superlink, which means you pay a portion of your premiums outside of super and a portion within. This helps add back some policy features that you might have lost, due to restrictions, if you ran all your insurance only through super.
How does super-link work?
Now let’s look briefly at why you might want to super-link your insurance policies, also sometimes referred to a flex-linking. The main reason is that this allows you to gain all the benefits of TPD and income protection that might be unavailable if you were funding everything through super only.
Especially important with regards to TPD and an own occupation policy. Meaning if you cannot work in the occupation you were doing when you were injured, you can claim. As opposed to an any occupation policy, which means you cannot claim if you can still work in any occupation you have experience, education or training in. Importantly, if funding your policy entirely through super you cannot hold an own occupation policy.
With income protection there are also many benefits that can be added back with super-link. These might include specified injury benefits, needle stick cover and many more.
So, the main advantages of super-linking are that, it keeps premium payments out of your own pocket lower, because they’re partly paid from your super balance, it allows you more comprehensive coverage regarding policies and you still achieve some discounts because premiums paid through super are eligible for a 15% rebate. For more information and help around these types of decisions please contact SMFS Insurance Partners on (07) 3064 0413 or contact us via the convenient messaging section on our website.