Paying for a policy through superannuation can save money but the rules over payouts can be strict, warns Patrick Commins.
I hear paying for life insurance is cheaper if you do it through your super fund. Isn't that a great deal?
It's true, you will pay less for insurance such as life (which, ironically, provides a lump sum to your nominated beneficiaries when you die) and total and permanent disability cover (TPD, which pays an income in the event you are unable to work again). That's because it's possible to pay your premiums from pre-tax dollars, as long as the policy complies with the relevant trustee rules. Plus your super fund will most likely be able to get a cheaper group rate than you could negotiate by yourself.
As a bonus, you probably won't have to pass a medical to be eligible. Some super funds also offer income protection, which provides you with income if you are temporarily unable to work. But be careful: you'll be paying your premiums from your super contributions.
What's wrong with that? If my insurance costs don't come out of my take-home pay, that means I've got more cash in my hand at the end of the day.
The problem is that most of us only make the 9 per cent contribution into our retirement savings as required by law. The consensus is that this is not going to be enough to guarantee a comfortable retirement. You subtract your premiums from that 9 per cent and, once you factor in compound interest on the forgone savings, you have put a big dent in your chances of being able to retire in style. You're essentially robbing from your future self.
I hear you but I'm going to be smart and put the money I save on premiums into my mortgage. That way I'll build up an asset base outside of super.
Well, even assuming you have the discipline to do that, there are some other problems with having life insurance inside super.
I thought you might say that.
The way it works is that when a policy is triggered, the insurer pays out to the super fund, which then pays you or your beneficiaries. It's important to understand that it's a two-step process. This necessarily means it takes longer to get your payout.
But there's a bigger problem than a delay - you might not get your money when you need it. While your insurer has paid out, in order for you or your loved ones to get their hands on the money, the proceeds will need to satisfy the "conditions of release" under the relevant rules governing your fund. Common conditions include reaching age 65 or becoming permanently incapacitated.
Another example is you have taken out TPD cover which pays you if you are unable to work in your occupation but the relevant tax rules dictate that the fund can only release benefits if you are unable to work in any occupation. Again, the money is locked up in your fund.
Well, I'll just make doubly sure that the policies are aligned with the trustee rules.
Smart. But wait, there's more. Let's say you nominate your spouse, underage children and/or financial dependents as the beneficiaries of your life insurance should you pass beyond this mortal veil. No problem, the payout will be tax-free. But leave it to anybody else - say, your grown-up children - then they're liable for a tax bill as the payment won't qualify as tax-free under super rules. The bottom line is you need to make sure that the cover matches your circumstances. Oh, and if you change super funds, you can't take your insurance with you.
All right, all right. But taking out insurance in your super can be cheaper, right?