We have recommended that you take out at least some of your insurances through superannuation. When we make this kind of recommendation, we are obliged to provide you with further information. These obligations are laid down by the Australian Securities and Investments Commission (‘ASIC’) and can be viewed here if you would like to see them (the contents on page 70 are especially relevant).
Whenever you purchase an insurance policy, the amount you pay is called the ‘premium.’ The premium is a cost to you. After you pay it, you will have less money. It is money well spent, though, given the benefits of having the insurance policy.
Having decided that you need insurance, you must then decide how to hold and pay for the policy. There are two main ways to pay for life insurance. One is to use your superannuation (‘super’) assets, with the policy then being held within the relevant super fund. The other is to use your non-super assets (basically, your current cash) and hold the policy yourself.
We have recommended that you hold at least some of your policies through super, and pay the relevant premium out of your super assets. Obviously, the balance of your assets will be reduced by the amount paid as a premium. Of course, if you held the policy outside of superannuation, you would still have to pay the premium and your non-super assets would fall.
Using super to hold insurance can often create a tax advantage. When this happens, then the net cost of the insurance is lower and holding the insurance through super makes that insurance cheaper. In addition to any potential tax advantage, the other major benefit of using super to buy insurance is a timing benefit. If you use super, your immediate cash flow is not affected. You won’t feel the effects of the cost of the policy until you reach retirement age. When you do reach this age, there will be less money in your super fund.
If you don’t use super to hold the policy, paying the premium affects your cash flow immediately. So, using super defers the point at which the premiums affect your cash flow. There are currently a lot of demands on your available cash – which is why you need insurances in the first place. Using super allows you to continue to meet more of these demands while also obtaining the insurance you need.
But it is important to us that you understand that when you use super to pay for insurance, the balance within your super fund reduces and you will experience the effect of this reduction when you reach retirement age. We have included a graph modelling the impact on your super within your SOA.
If you are concerned about this reduction in your super assets, there are a couple of responses available to you. The most basic is to make extra contributions into the fund so that the benefits paid as premiums are ‘replaced’ each year. If the extra contributions are ‘concessional’ contributions for which you receive a tax deduction, then you will have effectively paid the premium using pre-tax dollars. If the extra contributions are non-concessional contributions, there is no tax deduction for the contributions. But your super balance will be restored.
You may not be able to make extra contributions to restore your super balance at the current time. If so, then you have two further choices. One is to accept that you will have a lower super balance when you retire. The other is to defer your eventual retirement to give you more time to make extra contributions in the future.
Given your immediate situation, we think you need the recommended insurances. And we think using super to finance at least some of the premiums makes sense. There are various ways that you can respond to the fact that your super balance will be reduced. In future years, your circumstances will almost certainly change and the way in which you manage the impact on your super fund may also change. This is why it is important that you keep seeking our advice in future years – we can review your insurances each time and make sure you are managing them as well as possible.