Inside or out – where should your insurance be?

Do you know if you should be holding your insurance inside or outside of super? Do you understand the benefits and disadvantages of each?

Right now, there seems to be a lot of discussion around concerning this very matter so I thought I’d answer the question: What are the differences between having your insurance held inside your super or outside it? Sometimes the answer is… a whole lot!

Different insurance policies give you a wide range of benefits. But sometimes these benefits can be negated by having them set up the wrong way in the first place. Now most people know that many superannuation funds offer you the opportunity to take life insurance and other cover out inside your super fund. These kinds of policies often have what are considered "minimum" amounts of cover which is provided to you under their group policies. The process is usually as simple as ticking (or not ticking) a box when you filling out your superannuation forms with a new employer.

In my experience, many people have little or no idea of what they are actually covered for when they take out this kind of insurance through their superannuation. Many don’t even know if they are covered at all. (This is an issue that falls under the heading of "group insurances", which has its own limitations that I will cover in a later article.)

As I mentioned in a previous article, Life Insurance, TPD (Total and Permanent Disability), Trauma, and Income Protection are some of the most popular forms of personal risk insurance today. Now once you’ve decided you want this form of cover the next most important question you should ask yourself is: what’s the best way to set up the policy for me?

If you set your policies up inside your super, then the superannuation is effectively paying for your insurances. This might be great from a cash flow perspective because it eliminates another expense coming out of your pocket. However, it also means that your super may not grow as fast or reach as large of a sum, because part of your contributions, or your existing funds, are being used to pay for the insurance premiums.

Now this is particularly important to consider when taking out Income Protection insurance for example, because when it is paid from your pocket instead of your super fund, the premiums are tax deductible. This could mean you end up getting a big chunk of your premiums put back into your pocket when it comes to tax time. Of course, you have to make the premium payments first each year before you get anything back. And as we know as time goes on, premiums tend to rise so as household budgets get stretched, insurance is often the first expense to get dropped, losing you the benefits of being protected.

Alternatively the option of having individually underwritten insurance policies set up inside your superannuation can be a good alternative to the outside superannuation option. You can offset the cost of having your insurance set up inside your superannuation by making additional contributions to your super (up to your contribution limits). Many people even set up a salary sacrifice system and pay for their contributions out of pre-taxed income, which effectively means all the insurances in your super can become tax deductible.

As you can see, there are many different aspects to consider in regard to this as everybody has different needs and requirements. This is why financial advisors exist, to help you understand all these issues and work what is the best plan for you. If you haven’t looked at this recently, you should book a meeting with your financial advisor and find out what they can do for you!

I’d be happy to answer any of your questions in regards to this matter. Just email me at damian.espinosa@investorsdirect.com.au


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