For young families and other clients with cash-flow issues, obtaining cover from a super fund with premiums paid from salary sacrificed contributions offers a cost-effective alternative to paying for insurance with after-tax dollars.
According to the Association of Superannuation Funds of Australia, the vast majority of life insurance is now held in super, including 71 per cent of all death cover and 88 per cent of total and permanent disability (TPD) cover.
IOOF’s Technical Insurance Guide shows the potential funding advantages generated from holding death and TPD cover within super. It gives an example of a married couple with a mortgage where salary sacrificing into super generates tax savings, with the option of making additional super contributions as part of a strategy to maximise both cash flow and super benefits.
Another approach involves stand-alone life cover being obtained independently of the member’s super fund with the insurer’s trustee owning the policy, and premiums funded by annual partial rollovers from the member’s normal fund. While this works, it adds complexity to the process, can increase costs to the member and runs the risk of the policy lapsing, for example when a member changes jobs and starts contributing to a new super fund.
“If the member has forgotten the reason the super-owned insurance-only policy was taken they may mistake anniversary notices as a demand for payment, ultimately ignoring them and allowing the policy to lapse, or worse still asking the insurer directly to cancel the cover – with potentially devastating financial results,” warns IOOF Insurance Specialist, Peter Stathis.
Fortunately, improvements in technology and products have given planners another option in satisfying their best interests duty and also clients’ desire for choice and simplicity of process. Platforms can help consolidate client accounts, improve administrative efficiencies, streamline compliance requirements and allow advisers to focus on adding value.
The growing preference for platforms among financial advisers is shown by recent surveys, with Investment Trends finding that 38 per cent of risk was written this way in 2014, up from 29 per cent in 2013. According to another survey, the key benefit for advisers in such technology is improved client servicing, such as through enhanced reporting, simpler administration and greater accessibility.
For both advisers and clients, writing insurance through platforms offers increased convenience and service, compared to the partial rollover method. The simplification of having insurance, super and investments all in one place is another major advantage, particularly for clients seeking a superior life policy to that offered by their super fund.
Funding options for insurance are an important consideration in determining the ownership structure of a client’s cover, including estate-planning factors such as the taxation of benefits and beneficiary option flexibility. For wealth professionals, it is another opportunity to help maximise client benefits and deliver added value.
For more advice on funding premiums through super, download IOOF’s Technical Insurance Guide here: http://www.ioof.com.au/insurance#download
