Protect yourself using super

Superannuation is not just about your retirement. A secondary purpose is to protect yourself and your family.

Summary: It can be tax-effective to hold life and total and permanent disability insurance within super. Life insurance is taken out to protect family, so consider debt levels, school fees and other major expenses your spouse would be left to cover. TPD insurance needs to cover similar expenses, but remember that you will still be alive if claiming insurance for an injury that leaves you unable to work, so your personal financial needs will be greater.

Key take-out: The younger you are, the more life insurance you need. If you have young kids and a large mortgage, it makes sense to consider cover 10 or 15 times the size of your income.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Super is that great promise that you’ll have a grand sum of money to take yourself, and your betrothed, into a fabulous retirement.

As you work and earn, it grows, in a compounding fashion, so that when you finish toiling at 65 (or the time of your choosing), you can lean on it.

But what if you didn’t get to work for so long as to build a great nest egg? What if you’re not there at retirement? What if you’re dead?

One of the few other important uses of superannuation can be for purchasing insurance. Yes, that great grudge purchase. But though you never want to use it, it could be what saves you and yours from financial disaster.

Australians are becoming, slowly, more aware of the ability to meet insurance requirements inside superannuation. This is partly because of the levels of default cover offered inside super funds. It’s usually not much – and some believe it might be leading many into a false sense of security – but at least it’s something.

There are four insurances that come under the “life” insurance umbrella. But there are only three that you can get inside superannuation and only two, in my opinion, that you should consider taking inside superannuation.

The four insurances are life, total and permanent disability (TPD), trauma and income protection. The first three are lump sums. A defined event happens and the agreed amount is paid out as a lump sum.

Income protection, however, is designed to be an ongoing income stream that will replace a portion of your income while you are unable to work.

Life, TPD and income protection are generally tax deductions to a super fund, so they can be a tax-effective way to hold your insurances. Of the four insurances, only income protection is a tax deduction in your personal name. And this is one of the reasons it generally makes more sense to hold this insurance outside of super, as the potential tax deductions are larger.

Income protection policies held outside of super are also, generally, of a far higher quality, as they are not bound by the restrictive super rules.

But today I’m going to focus on life and TPD insurance.

Life insurance

It’s a simple concept. You’re dead, making you entitled to a payout.

Life insurance is taken out to protect family. There’s no need to protect yourself if you’re not around, so it’s generally designed to give your family a sum of money to continue with you no longer around to earn a living.

When considering levels of life insurance cover, take into account debt levels, how much income you’re likely to earn before retirement, school fees and any other major ongoing expenses that you’ll be leaving your spouse to cover.

The younger you are, the bigger this figure is going to be. If you’ve got young kids and a big mortgage, then you, arguably, should be looking at cover 10 times, possibly 15 times, your income.

Don’t forget cover for your spouse. If they’re not around, would your lifestyle or ability to work be severely compromised, particularly with young children?

As you age, as your assets grow and future income requirements decrease, your need for insurance falls. Eventually, you should hit a point where insurance is no longer required.

However, outside of a massive windfall, you rarely hit a point where you go from needing plenty of insurance to needing none. Over time, you slowly cut your insurances, as their need decreases.

Inside super, life insurance can be left tax-free to dependants. That is generally your partner or minors. If you are leaving it to adult non-dependant children, there will generally be some tax to pay.

(Outside of super, life insurance is not a tax deduction, but the proceeds are generally not taxable.)

Total and permanent disability insurance

TPD insurance pays out a lump sum when you have been injured, have not been able to work for six months and are unlikely to work again.

An example would be an accident leaving longer-term physical disabilities, but it can also apply to illnesses which make you permanently unable to work.

There are two main definitions of TPD – “own” or “any” occupation. Any occupation is the harder to qualify for and, as a result, is generally less expensive. Own occupation costs more, but is more likely to be paid out.

Deciding on a coverage amount for TPD should take into consideration similar sorts of amounts of money as for life insurance. However, importantly, you’re still going to be alive, so your personal financial needs will be greater.

TPD payouts generally incur some tax. How much is determined by a complex formula that takes into account how many days you’ve been a member of the fund and how many days you have until retirement.

Again, with TPD insurance, large sums would be recommended when the member is young, has large debts and young children to consider. And similarly, as you age, the amount of TPD can be reduced, as the value of other assets increase.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Bruce Brammall Financial and the author of Debt Man Walking. E:

  • Investing in direct property can reduce volatility in an SMSF portfolio, according to research by Australian Unity Investments. The asset class is particularly beneficial to SMSFs given its reliable, recurring income, AUI head of portfolio management Ryan Banting told reporters.
  • SMSFs have too little exposure to global equities and are missing out on currency, diversification and capital growth benefits, PM Capital says. Australian equities portfolio manager Uday Cheruvu told reporters that in Australia it is harder to invest in companies with a higher growth potential over a longer period of time.
  • The SMSF Professionals’ Association of Australia has welcomed the Federal Government’s statement that a proposed register of financial advisers must include their qualifications and professional association membership. “It’s only when a register includes all the relevant information will consumers feel confident they are getting the best possible advice,” SPAA CEO Andrea Slattery said.

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