Holding life insurance inside super can be a cost-effective solution for clients, as well as providing strategic planning opportunities for wealth professionals.
According to the Association of Superannuation Funds of Australia, the majority of life insurance is held in super, with group insurance representing 71 per cent of all death cover and 88 per cent of all total and permanent disability (TPD).
This reflects the benefits, which for a client may include potentially cheaper insurance premiums under some funds group policies, as well as easier underwriting standards due to high automatic acceptance limits.
Premiums are automatically deducted, so clients with cash flow issues can still obtain sufficient cover– an important consideration given statistics showing one in five parents will be unable to work or die before retirement age.
For advisers, IOOF’s Technical Insurance Guide provides a number of examples showing how insurance premiums can be cut by using super.
In one such example, Jack and Dianne are a married couple with a mortgage. Jack earns $100,000 per annum while Dianne is currently out of the workforce. The adviser recommends a $1,000,000 life insurance policy, with an annual premium of $1,181.
If Jack purchases cover outside of super, the pre-tax cost will be $1,936, including $755 from tax at his 39 per cent marginal rate and the Medicare levy. By insuring through super, he gains $755 as a pre-tax saving in the first year and $461 after-tax.
Jack has the option of making additional super contributions to fund the cost of the cover, or having it deducted from accumulated investment benefits. Another option is funding the premium by salary sacrificing an additional amount of pre-tax salary, so the employer contributions are increased by the premium amount.
In both cases, a clever strategy can maximise the client’s cash flow as well as the benefits of holding insurance cover inside super.
Another option for price-sensitive clients can involve transferring the client’s super and non-super investments to a common platform, which offers fee aggregation and high quality retail life insurance. As well as providing quality product and benefit definitions, it can be possible to cross-subsidise children’s advice fees under a family advice fee, as well as cross-subsidising younger generations’ administrative costs.
SMSFs
For self-managed super funds (SMSFs), trustees are required to consider insurance for members as part of a fund’s investment strategy, as well as assessing the benefits of holding insurance inside or outside of super.
If the trustee determines insurance should be held within the SMSF, this needs to be documented, including potentially with a statement of advice from a financial planner. A review of a fund’s investment strategy to consider personal insurances may serve as a timely reminder to ensure other insurances are in order.
Obtaining life insurance inside a super fund offers a number of advantages for clients, the most significant are; the convenient packaging of premiums within their compulsory superannuation contributions and the tax efficiency of using pre-tax dollars. For more tips, check out IOOF’s Technical Insurance Guide: http://www.ioof.com.au/insurance#download
