Superannuation changes set off insurance alarms

Keeping insurance inside super may no longer be viable for some.

Summary: Insurance inside super from next year will require a re-evaluation. Lower contribution limits have tilted the field.

Key take-out: Depending on your concessional contributions, it may make sense to move your insurance premiums into your personal name. But that can be a minefield.

Key beneficiaries: Superannuants. Category: Superannuation. 

Life insurance inside superannuation has been a relatively simple equation for most Australians, until now.

Current higher contributions limits and the advantages of tax deductibility had meant that, for the majority, it made sense to have at least life and total and permanent disability (TPD) cover inside a super fund.

But now, a swathe of Australians – most of whom will run self-managed super funds – will need to reconsider taking their family protection outside of super.

Why? Because, if you have considerable insurance requirements and are maxing out your now-lower concessional contributions, you might chew up too much of the money you can get into super by paying insurance premiums.

Moving outside of super

To maximise your super, it might make far more sense to pay for insurances outside of superannuation.

Instead of getting a 15 per cent tax deduction for the premiums inside super, perhaps take the insurance coverage (or move your existing insurance covers) outside of super.

This won’t be the best option for everyone. But the number who should consider doing so will rise exponentially following on from the nearly 30 per cent drop in the maximum contributions level, which apply to everyone from July 1, 2017.

From then, everyone will have the same $25,000 maximum super contributions limit for concessional contributions. This is a reduction from the current limits of $35,000 for the over-50s, and $30,000 for the under-50s.

But what if you assessed your needs for insurance, and the cost to get that cover is $5000? The cost of the cover is now eating into the reduced amount you can get into super. At $5000 of premiums, 20 per cent of your $25,000 of CCs are now being chewed up by insurance coverage.

The cost of $2 million worth of straight life cover for a 55-year-old male, non-smoking, white collar worker, is approximately $7000 a year. For $2m worth of life and TPD insurance, it’s nearly $15,000 a year.

And those numbers are a far bigger percentage of $25,000 than they were of $30,000 or $35,000.

As for income protection? A 55-year-old white collar worker trying to insure 75 per cent of a $120,000 annual income would have a minimum premium of around $3000 for a base-level (indemnity policy, 90-day waiting period, to age 65) policy.

Note: In my opinion, income protection is almost always better done outside of super. The quality of the policies are better, as they don’t have to conform with super legislation. And it is a tax deduction at your marginal tax rate, of up to 49 per cent, rather than 15 per cent inside super.

My point is this, that anyone who has the cash flow that will allow them to maximise their concessional super contributions to $25,000 a year, who has insurances inside super, should put some thought into moving that insurance outside of super and into their personal names.

It’s not a straight one-size, fits-all suggestion. It will depend on your personal circumstances. But for a tax deduction of 15 per cent of the premium on your policy it will, in many instances, make sense to take the policy outside of super.

The drawback is that, for life and TPD insurances, there are no tax deductions for the premiums when taken in your personal names (it might qualify as a business expense, if the cover is taken there, but speak to your accountant or adviser).

How do you take a policy outside of super?

If you make the assessment that you need, or should, transfer or reorganise your insurances to being owned outside of super, there are two main ways of doing this.

The first way is to simply take out new insurances outside of your SMSF (or, if you have your insurances inside an APRA-regulated fund, it is the same principle).

This can be a good opportunity to re-examine the level of cover that you have and decide whether you need less (or more) than you currently have, and re-apply for that insurance in your personal names.

If you are considering doing this, make sure that you apply for, and receive, insurance on terms that are acceptable to you before you cancel your existing insurance policies.

One advantage to doing this includes being able to change supplier (if your existing insurer has become expensive, or their insurance terms are less competitive). The main downside is that if your health has deteriorated since taking out the policy, you might not be able to get it on the same favourable terms.

(I’m assuming for a second that most people’s heath gets worse with age. If your health has actually improved, which can happen, then you might get more favourable terms while redoing your insurance this way also.)

Transferring policy ownership

If your health has deteriorated, or the cost of your policy would increase by taking out a new policy, then you might also wish to examine transferring your existing policy (inside your SMSF or APRA-regulated fund) from being owned by the super fund trustee to your own name.

This usually means requesting from the trustee of your existing fund for a transfer of ownership. If this is a SMSF, you would think that his would be a reasonably simple request, but there are complications. If it is coming from an APRA-regulated fund, there are complications also. And, in most cases, it actually will not be allowed by the insurer.

I wish I could summarise them here. I can’t. You will need to speak to your individual insurer and ask what their requirements are for the transferral of policy ownership. Expect a “no” in many cases.

Then you need to effect the transfer itself. This can, of itself, set off a blizzard of paperwork. I’ve done this a few times for clients. Some insurers offer a bit of paperwork. But it’s relatively straightforward. Others make the above option – of reapplying for new insurance – look like the better and easier option by a long shot.

Technically difficult - get advice

Sometimes it is easy. Sometimes, it requires patience that you have not needed to draw on before. And sometimes the paperwork will not just be astounding, but could actually take you to an early grave.

If you don’t know what you’re doing, get advice. Pay a financial adviser to organise it for you.

If your health has deteriorated since you last took out insurance, a financial adviser will know where your best shots at keeping equivalent insurance will lie. You can do this yourself, but generally insurance is a very specialised field, and professionals will pay for themselves.

This is a topic too big to cover in just one article. I will return to this area in later columns.

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 a licensed financial advisor, a mortgage broker and an expert on self-managed super funds. He is a regular contributor to Eureka Report. To contact Bruce, please click here.

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