Risk insurances and superannuation
It has always been a smart strategy to recommend life insurance be held inside a client’s super fund. This effectively makes the premium tax deductible, which maximises the after tax efficiency of the premium. In summary, it gets more after tax sum insured for the same after tax premium, so it’s definitely in most client’s best interests to do this.
Traditionally income protection insurance was not held inside a super fund because of concerns about when benefits could be paid: the circumstances giving rise to a benefit being paid may not be a condition of release under the super law.
Since 1 July 2014 these concerns have disappeared: all insurances offered inside a super fund must have policy wordings that align with the conditions of release under the super law. This means income protection benefits have narrowed, to align with the more restrictive conditions of release. But the good news is benefits can be funded out of super benefits.
This is particularly pertinent to clients with clear and significant risk insurance needs, but a limited capacity to pay out of non-super monies.
It can be a good strategy for a client to hold income protection insurance through a super fund but the SOA must stress, and the client must understand, that:
- this may mean a less generous definition of disability
- there are no significant tax benefits because the premiums would have been tax deductible anyway
- long term retirement benefits will be less than otherwise
- additional catch up super contributions may be needed in later years.
The SOA has to weigh the advantage of increased short term insurance cover against the disadvantage of decreased long term retirement benefits. The client’s particular circumstances including their current and future income prospects, their family obligations, their total wealth including both their super and non-super assets, their eligibility for Centrelink benefits, their age and state of health and the likelihood of a claim being made.
Take care when recommending risk insurances be placed in super funds. ASIC has banned an adviser for recommending this without proper consideration of the effect of the strategy on the client’s long term retirement prospects. It’s a good idea to suggest the premiums be compensated by additional contributions earmarked to pay the premium, assuming affordability is not an issue. In all cases make sure the client understands that paying the premium out of super means his or her retirement benefits will be less than otherwise, and that they accept the compromise between their need for adequate insurance now and their long term retirement, and or some other retirement strategy is in place.