The benefits of having life cover within super, such as lower premiums, fewer barriers to obtaining coverage, and greater convenience.
The issues to be mindful of, such as a lack of portability, gaps in coverage between jobs, limited customisation, and reduced benefits.
When it comes to securing your financial future and protecting your loved ones, life insurance is a key consideration.
A common question that crops up for us is whether you should have life insurance within your superannuation fund. This decision has its share of advantages and disadvantages that warrant careful consideration.
Here, we’ll explore some of the pros and cons of having life insurance inside your super, helping you make an informed choice to suit your own individual circumstances.
There are several key benefits of having life cover within your super:
Cost-effectiveness – One of the most significant advantages is the potential cost savings. Group insurance policies obtained through superannuation funds often come with reduced premiums compared to standalone policies. This affordability is due to the collective buying power of the fund’s members, making it an attractive option for the budget-conscious.
Convenience – Life insurance within your super offers a streamlined approach to managing your financial affairs. The premiums are automatically deducted from your super balance, eliminating the need for separate direct debits or payments. This can be especially appealing for those who prefer a convenient solution.
No impact on cash flow – Opting for life insurance inside your super can help you avoid direct impact on your regular cash flow. Since premiums are deducted from your super account, you don’t have to worry about budgeting for it in your monthly expenses.
Access to cover without health checks – Group insurance policies provided through superannuation usually allow members to access insurance cover without undergoing extensive medical examinations or health checks. This feature can be advantageous for those with pre-existing health conditions or a history of medical issues that might otherwise result in higher premiums or coverage denials.
Default coverage – Many super funds automatically include a basic level of life insurance cover for their members. This default coverage ensures that even if you haven’t actively selected an insurance option, you still have some level of protection in place.
Benefit options – Upon death, many super funds allow certain beneficiaries, such as the spouse to receive an income stream (within limits) to provide ongoing tax-effective income. In contrast, insurance held outside super generally pays out a single lump sum.
The main issues with having your life cover within your super are:
Limited customisation – Group insurance policies within superannuation funds are often designed to cater to a broad range of members. As a result, the level of customisation available might be limited compared to standalone policies. This could mean that the coverage you receive might not be as well suited to your individual needs.
Reduced super balance – by paying the life insurance cover through super rather than cashflow, the premium effectively reduces your super balance. You may wish to consider additional contributions to ensure you do not erode your retirement savings over time.
Coverage gaps between jobs – If you switch jobs and change super funds, there might be a gap in your insurance coverage. This can leave you vulnerable during the transition period, especially if you have health conditions that may affect your eligibility for new insurance coverage.
Lacking in portability – Super funds often have restrictions on the portability of insurance cover. If you decide to leave your current fund, you might not be able to take your insurance policy with you, leaving you to navigate the complexities of obtaining new coverage.
Tax implications – Depending on your age and the type of insurance coverage, there could be tax implications when it comes to paying premiums and receiving benefits within your super. It’s important to understand the potential tax consequences before making a decision.
How to decide which option is right for you
Firstly, assess your needs. Start by evaluating your personal circumstances, including your financial obligations, family situation, and existing insurance coverage.
This will help you determine whether the default coverage provided by your super fund is sufficient, or if you need additional insurance.
Once you’ve done this, consider the following steps:
Compare policies – If you decide to explore insurance options within your super, don’t settle for the default coverage without comparing it to other policies in the market. Consider factors such as coverage limits, benefit payouts, and any additional features offered.
Seek professional advice – Making the right decision about life insurance is vital. Seeking advice from a qualified financial adviser can provide you with personalised insights. They can help you understand the pros and cons within the context of your overall financial strategy.
Conduct regular reviews – Life circumstances change over time, so it’s important to regularly review your insurance coverage to ensure it remains aligned with your needs. As your family grows, you purchase assets, or your health situation changes, your insurance requirements may evolve as well.
It’s also important to note that insurance in super is no longer automatically provided to those who are under 25 years of age unless they work in a dangerous profession. However, it can still be obtained by under 25s upon request. Similarly, insurance is no longer automatically provided to new super fund members if their balance is under $6000.
As life progresses, it is just as important to not be over insured as being under insured. For example, if your children have left home and your mortgage has been paid off, the level of cover you require will be substantially less than those with home loans and school fees to pay.
Insurance in super could have additional benefits and services for members, so it’s best to check what is available to you.
The decision as to whether or not you should include life insurance within your super fund requires careful consideration of the pros and cons. While the cost-effectiveness and convenience of group insurance policies can be appealing, there are potential limitations that might not meet your individual needs.
By assessing your situation, comparing policies, seeking professional advice, and reviewing your coverage regularly, you can make an informed choice that provides the right level of financial protection for you and your loved ones.
Remember, there is no one-size-fits-all answer, and your decision should be based on your own circumstances and future goals.
Source: MLC October 2023
This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. NULIS is part of the Insignia Financial group of companies comprising Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate (‘Insignia Financial Group’). The information in this article is current as at November 2023 and may be subject to change. This information may constitute general advice. The information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. It is recommended that you consider the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD) before you make any decisions about your superannuation. You can obtain the latest copy of the PDS (or other disclosure documents) and TMD by calling us on 132 652 or by searching for the applicable product at mlc.com.au. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. The case study examples (if any) provided in this article have been included for illustrative purposes only and should not be relied upon for decision making. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the Insignia Financial Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.