Should you hold personal life insurance inside or outside your superannuation fund?

Personal life insurance is a smart way to protect your quality of life and provide for yourself and your family if you die or get sick or injured. Personal life insurance is more than just life cover that provides a lump sum payment to your nominated beneficiaries in the event of your death. It can also include:

• Income protection: regular payments to replace your income, should you be unable to work, due to illness or injury.
• Total permanent disablement (TPD) cover: lump sum payment if you are no longer able to work due to permanent illness or injury.
• Trauma or critical Illness cover: lump sum if you suffer one or more defined medical conditions such as stroke, heart attack or cancer, amongst others.

One of the common questions asked is whether these types of policies should be held inside or outside of your superannuation fund.

Holding personal life insurance inside your superannuation

Of the four kinds of life insurances referenced above, only income protection, total and permanent disablement (TPD) and life cover are available through most superannuation funds. It’s essential to ensure these types of personal insurances are sufficient for your needs and covers the unique risks your vocation presents.

Advantages

• Life and TPD insurance are generally not tax deductible if held outside of superannuation. By holding this cover in your superannuation fund, you can take advantage of superannuation rules which may provide you with tax benefits.
• Many industry and employer super funds have group insurance policies available which can be cost‑effective.
• It’s easy to manage because premiums are automatically deducted from your super balance.
• Some super funds have automatic acceptance up to certain amounts, with no need for a medical history check.

Disadvantages

• Reduces your superannuation balance – as premiums are paid from your superannuation savings, your superannuation balance will reduce by the premium paid each year and could reduce the balance available for your retirement.
• It’s not always portable – if you have insurance inside your superannuation and change superannuation funds, your cover may not always move with you or remain with the same amount or conditions. If this is the case, you may have to apply for new insurance. Applying for new cover means a new insurer may look at your health history and you may not be covered, or it may cost more.
• Death benefits may be taxed, depending on who the benefit is paid to.
• You may pay tax on a TPD claim payment when your insurance is held through your superannuation.
• Limited cover – the types of insurance and level of cover are limited so they may not be tailored to your needs as a doctor.
• If you cannot work in your specialty as a result of illness or injury but can work in another specialty, you may find you are not covered due to the occupation definitions for the fund.
• Slower to pay out on claims – there can be delays in receiving benefits for death cover as the insurer pays the benefit to the fund first and then distributes it to beneficiaries guided by superannuation legislation.
• If you do not make a binding beneficiary nomination or your fund does not offer binding nominations, the superannuation trustee will decide who gets your benefits when you die, but your nomination will be taken into consideration.
• Life insurance cover through your superannuation ends when you reach a certain age (usually 65 or 70), while policies outside of your superannuation may cover you for longer.
• Trauma and practice expense cover is not available through superannuation.
• Different conditions of release – superannuation fund trustees decide on the terms of release of a superannuation benefit. Sometimes these terms are more stringent than those from a life insurance company, meaning a benefit may not be paid by the superannuation fund that may have been paid by the life company.

Insuring outside of your superannuation

All personal life insurances are available outside superannuation including income protection, life, TPD, trauma and practice expense cover.

Advantages

• Portability – you can continue to keep your cover without having to apply for new cover when you change employers, superannuation fund or start your own practice.
• Income protection premiums are tax deductible.
• You may receive your benefits faster as any benefits are paid directly to the policy owner.
• Life and TPD insurance benefits are not taxed.
• You can insure for your area of specialty as a doctor so you won’t be forced to take on other jobs if you can’t work in your chosen specialty.

Disadvantages

• Any life and TPD insurance premiums you pay are generally not tax deductible and you would be paying for these premiums with post‑tax dollars.
• Your cover may cost you more as there is no group discount option.

An example

Dr Smith has an income of $250,000 per annum. He is 40 years old, in good health and a non smoker. He wants to protect his income in case of sickness or an accident.

For his income protection policy, which would pay 70% of his pre-injury income, Dr Smith would like a 30 day waiting period, with a benefit period of 2 years. For the purposes of this example, his premium is $267.48 per month.

If Dr Smith pays for this policy outside of his superannuation fund, his premium of $267.48 per month and it would be tax deductible to him. He would need to factor in the impact on his personal cashflow and ensure it is affordable.

If he pays for this policy inside his superannuation fund, his premium would be tax deductible to the super fund at the tax rates that apply to them – usually no more than 15%. Because the premiums are paid for by the super fund, Dr Smith doesn’t have to worry about whether it is personally affordable but does need to consider the impact on his long-term super balance.

We work exclusively with doctors

There is no simple answer as to whether you should hold insurance inside or outside of your superannuation and you may be better off with a mixture of both.

Our life insurance advisers can help you decide the right balance for your circumstances as a doctor, and have access to a broad menu of life insurance products that have been selected for features that are appropriate for medical professionals. We work exclusively with doctors and have an intimate knowledge of the risks you face. Whether you need help understanding the insurance options available, wish to review your current cover, have a question regarding a cover or a complex circumstance that requires professional analysis and detailed personal advice, we can help. Our life insurance advisers can ensure you are not paying for what you don’t need but are covered for everything you do.