Personal insurance policies, such as death, total & permanent disability (TPD) and income protection insurance, are often held within super. In fact, more than 70 per cent of personal insurance policies in Australia are held through super funds (see Insurance through Superannuation, Rice Warner, April 2016)
The popularity of holding personal insurance in super is largely due to a range of benefits, including:
- Insurance premiums are often cheaper than outside super, as group super insurance policies are generally able to gain significant scale benefits, which can lower costs.
- Paying for insurance in super is more tax-effective. This is mainly because the insurance premiums can be funded by pre-tax contributions and the premiums are generally tax-deductible to the fund.
- The premiums can be funded by a member's super balance without affecting their cash flow. This makes insurance affordable for individuals with cash flow difficulties who otherwise would not be able to protect their lifestyle or that of their loved ones.
- Many super funds offer automatically accepted cover to members, without them having to go through medical underwriting. This can be appealing to members who have certain pre-existing medical conditions or work in high-risk occupations, however, it is worth noting the increased prevalence of 'pre-existing condition exclusion clauses' that exist in many automatic insurance cover arrangements.
Despite the benefits, there are a number of pitfalls that need to be considered when recommending insurance though super. In this article, we take a look at the pitfalls associated with TPD insurance through super and potential strategies advisers can use to overcome them.
Issues with 'own occupation' TPD insurance definitions
Since 1 July 2014, legislation requires that new insurance cover within super can only be taken out if the insurance definition is consistent with the super death, terminal medical condition, permanent incapacity or temporary incapacity conditions of release.
This is to ensure that in the event of a successful claim, the insurance pay-out can be accessed immediately. This also means an insurance cover that is not aligned with the conditions of release, such as, 'own occupation' TPD, 'agreed value' income protection and trauma cover, can no longer be issued within super. The policies in existence before 1 July 2014 may be able to be maintained under the grandfathering provision although some super funds have decided to apply this retrospectively to all members.
The 'own occupation' TPD cover can secure a higher chance of a successful claim. Initially, it appears this can be simply solved by holding such a policy outside super, however, the insurance premium can be more expensive and it is not tax-deductible.