Benefits of insurance within super sometimes illusory
Superannuation funds have acknowledged that the cost-effectiveness of providing insurance within superannuation might prove illusory at claims time because of the "distortive effective of regulatory settings".
In a key follow-up submission to the Productivity Commission inquiry into the Efficiency and Competitiveness of the Superannuation System, the Association of Superannuation Funds of Australia (ASFA) has pointed to the regulatory discrepancies which can serve to alter the perceived advantages of providing insurance within super.
The submission said that while it was generally true that it was more cost-effective to provide insurance within superannuation, it was important to note "the distortive effect of the regulatory settings with respect to the taxation of insured benefits inside and outside superannuation".
"While it is more cost efficient to provide death and total and permanent disablement (TPD) lump sum insurance through superannuation, the differing tax treatment of benefits paid out can lead to significant differences in the amount of the net benefit received by the member/beneficiaries," it said.
The submission noted that part of lump sum TPD benefits (before age 60) and all of death benefits (to non-dependants) paid from superannuation funds were subject to tax at a rate up to 32 per cent, whereas death and TPD insurance payouts made outside superannuation were tax-free in the hands of the recipient.
"As a consequence of this disparity, while provision of insurance in superannuation is generally more cost-effective, depending on their circumstances, some members may receive advice to obtain insurance outside superannuation because of the reduction of the amount of a benefit received from a superannuation fund due to the effect of tax," it said.
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