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For many decades, it has been widely accepted that it is best to hold insurance through your superannuation fund.
However, with the introduction of new legislation and without considering your individual circumstances, it might be time to challenge that idea. And to speak to your First Samuel Private Client Adviser.
Why use superannuation to hold your insurances?
The primary advantages of holding your insurances via your superannuation fund are two-fold:
- having insurance premiums paid from your superannuation fund frees up your personal cash flow.
- insurance premiums are tax-deductible to the fund; and
Creeping changes
At an initial glance, both these benefits are great. However, the passage of many changes to laws and emerging regulatory pressures over the past several years conspire to challenge that old notion.
Recent Australian Prudential Regulatory Authority formal letters to insurers and superannuation funds warn of concerns with insurance cover sustainability (i.e. premium volatility and longer-term premium affordability).
- In 2014 the types of insurance that could be held in superannuation were reduced: no trauma insurance, no ‘own occupation style policies’ and fewer add-on benefits
- From 2017 a person could no longer make after-tax contributions once their member balance exceeded the transfer balance cap (between $1.6m and $1.9m)
- The changes also lowered the amount of pre-tax contributions a person could make to superannuation each year
What this means
In essence, the changes:
a) limit the amount that individuals can accrue wealth in the tax-advantaged superannuation environment; and
b) reduce the quality of insurance available.
Issues
Firstly, insurance policies offered via superannuation may not always be suitable for every person, particularly those who have specific insurance needs. Examples include those requiring the added protection of an ‘own-occupation’ policy definition – such as surgeons. Such policy definitions were rendered incompatible with superannuation.
Secondly, by paying the life insurance premiums through superannuation rather than personal cashflow, the cost of the premiums effectively reduces your super balance. Unless you are making additional offsetting contributions equal to the premium amount, it is less likely that your member balance will achieve its initially projected outcome. This is particularly so if your insurance premiums have been growing more quickly than the forecast rate of inflation.
In October 2018, the Productivity Commission estimated that the detrimental effect of insurance premiums on the retirement balance of low-income members or those with intermittent work patterns could reach as much as 28% or $125,000 for some disadvantaged members.
The disadvantage will be higher for medium or high-income earners. There is now a real opportunity cost associated with holding insurance via superannuation. This may be exacerbated if the government’s proposed ‘excess member balance tax’ on balances greater than $3m comes to pass.
Summary
Do you have or are likely to be in a position of significant wealth and are seeking to maximise your wealth through optimal utilisation of taxation structures?
If so, then holding insurances via superannuation may place an unnecessary drag on capital accumulation in your most tax-advantaged entity.
Therefore, it is important to have an adequate understanding of your insurance position rather than leaving it to chance. At the very least, you should know what the likely impact of insurance on your future retirement plans will be, make any necessary adjustments accordingly, and have looked into the adequacy of your insurance policy for your situation.
…or simply speak to your First Samuel Private Client Adviser.
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The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation, or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.