Should I have insurance in super?

There are three main ways to insure yourself in Australia:

Inside of superannuation with a group policy
Outside of superannuation with a retail, individual policy
Self-insurance

Each option has its advantages and limitations, but this article is going to focus on the first two options. This is because self-insurance is difficult and is not achievable for many of us. It requires large sums of money to make it work. The concept is that if there is an event that requires insurance, you have the funds to rectify the issue, without becoming destitute or impacting your life adversely. For example, if you die and leave your partner with a large mortgage that they are unable to pay. As you can tell, this situation would require large sums of money to be possible.

The insurances that we will be discussing today focus on life-altering events. The include:

Life insurance: Paid at death, or in some cases earlier if the claimant has a terminal illness
Total and Permanent Disability (TPD) insurance: Paid if the claimant has experienced an event that has left them totally and permanently disabled, and unable to work. However, there are differing opinions of what constitutes as unable to work. We will go into this in further detail.
Income Protection Insurance: This insurance looks to help cover you for unexpected accidents or illness that will prevent you from working. This is another case where there are different levels of cover depending on whether you take out insurance inside our outside of super.
Trauma Insurance (TI): Trauma coverage protects individuals who may suffer a critical illness or injury, and is a lump sum payment. It is prevalent with workers in physical or laborious jobs that are reliant on their physical health to work.

Firstly, it is worth noting that not all insurances are available in and out of super. These are the types of insurances available:

Costs

Costs are a large consideration for insurance. Generally, retail policies are more expensive but are tailored to the individual. The main differences and considerations with costs can be found below.

Policy features: Super

There are some nuances that come with taking out group insurance compared to individual, retail policies.

The first is that group insurance policies do not usually require medical underwriting. Financial advice professionals often advocate for exploring whether a retail policy will cover an individual before cancelling their insurance within super. This is particularly true for those with pre-existing conditions.

This is not unconditional. There may be certain exclusions in the group policy that include certain health conditions or high-risk occupations.

Group insurance policies often do not exactly meet the needs of the individual. For example, with Total and Permanent Disability (TPD) insurance, most group insurance policies will only cover ‘any’ occupation, while retail policies can cover ‘own’ occupation.

This can make a major difference to someone who needs to claim. Any occupation means that the claimant is not able to perform ‘any’ role. A specialised surgeon who has spent over a decade studying and specialising would not be eligible for the cover if he lost his hand in an accident. He is still able to work other roles, such as a consultant, even if they are a significant step down from his qualifications. Retail policies are able to cover ‘own’ occupation. If you are unable to perform your usual duties in your role, you will be eligible to claim on the TPD policy.

I used to work at a superannuation fund and assisted in submitting claims. I can tell you firsthand, these claims take an extended period to get processed and paid out. This is due to several layers of approval that come with holding funds within super, where a trustee must also approve the claim before funds are disbursed. It is one of the disadvantages of group insurance policies and worth keeping in mind if you or the beneficiaries of your policy do not have a long runway of emergency funds in case of death, illness or injury.

Policy features: Retail

Retail policies are customisable and offer specific cover for the individual. The cover can be tailored to ensure that the individual is covered adequately and increase the chance of successful claims if the circumstance arise.

This flexibility also offers better and broader coverage. For example, with income protection. Many group insurance policies are limited to two years. Retail policies can offer protection up to 65 years of age. If you’re in a situation where you are unable to work due to a critical injury, it is likely that you will continue to suffer complications past the two year period. Retail policies allow the peace of mind to protect yourself for the rest of your working life. As mentioned above, TPD policies can be taken out as ‘any occupation’ with retail policies as well.

Retail policies also have extra features, including inclusions for rehabilitation support or wider inclusions for health conditions.

As there’s no superannuation trustee, claimants will usually experience a faster approval and payment as the funds are paid directly to the individual.

Tax implications upon payment

We discussed the implications of the premiums, but there are also tax implications on payments that are worth noting.

Group policies within super may be taxable depending on your circumstances. This is mainly dependent on whether the beneficiaries of your policy are classified as a tax-dependent under superannuation law. The benefits are also (in the case of TPD and death insurance) split into taxable and tax-free components.

Generally, life insurance and TPD policies are not taxable for retail policies.

Any income stream from income protection payments will be taxed as regular income in both group and retail policies.

Key considerations

Like with many aspects of your personal finances, you do not have to pick a side. Some of us, the best solution may be to have a mix of super and retail policies. For others it may be one or another, depending on cashflow and ability to afford premiums with post-tax wages, whether the coverage within super is adequate, and the tax efficiency of both options. As mentioned, insurance in super might also suit individuals that have pre-existing conditions that may not get approved for retail cover.

One key consideration, especially for younger Australians, is the impact that premiums have on their superannuation balance over the long-term. Taking premiums out of your super when you are young often results in a large opportunity cost for compounded earnings and growth. I go through an example in this article.

If insurance within superannuation makes sense for an individual, it is worth considering replacing the insurance premium amounts through concessional or non-concessional contributions (in that order).

I want to take out retail or super insurance cover, where do I start?

To start with, understand and assess your current insurance situation.

Understand whether your employer (or yourself) already cover these outside of super.
Whether you have dependents – if you don’t – who would be the beneficiaries of a life insurance policy? Determine whether it is necessary.
The level of cover – MoneySmart has an insurance estimator, but you can also seek professional advice regarding what level of cover is sufficient.

You are able to search for insurance brokers that can give you quotes on retail cover, and your superannuation fund will be able to give you a quote for your insurance cover, customised to your desired levels.

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