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Managing your loan

Personal insurance through superannuation


Justin McMillan, Guest blogger, Smartwealth

4 min

This post is based on content prepared by Justin McMillan of Smartwealth (https://www.linkedin.com/in/justinmcmillanwealthcoach/) on behalf of Keystart Home Loans. Smartwealth is a corporate authorised representative of RI Advice, AFSL 328429.

 

We all know about the benefits of having our home and car insured. These items are important to you and insurance protects you against accidents and damage. What about insurance to cover you?  You are your most important asset not only physically but financially too.

If you have a mortgage and family responsibilities, you may find it reassuring to have personal insurance such as life insurance, total and permanent disability cover and income protection insurance.

Personal insurance premiums can be a significant cost.  One option for overcoming this hurdle is to organise personal insurance through your superannuation. The premiums would then be deducted from your superannuation account rather than paid for with your after-tax income. There may also be tax benefits in paying your premiums this way.

You may already have some personal insurance included in your super or through other policies. It is common to have some life and total and permanent disability cover included in superannuation funds.

The first step is to check what insurance you currently have, and what may be available through your superannuation fund.

Three types of personal insurance

Life cover

Life cover, also referred to as death benefit, pays a lump sum (the sum insured) to your beneficiaries if you pass away or become terminally ill.  This lump sum payment is designed to allow (but is not limited to) your loved ones to:

  • pay out a mortgage so they can continue to live in their home
  • meet their day to day living expenses
  • fund education costs, and
  • pay off other debts.

Total and permanent disability (TPD) Cover

TPD cover pays a lump sum (the sum insured) to you if a doctor ascertains that you can never work again due to sickness or injury.  This lump sum payment can be used for any purpose, but usually most people use it to:

  • pay for home modifications and lifestyle changes
  • pay for long term care and ongoing medical expenses
  • pay off any debts – e.g. a mortgage, personal loans, and
  • invest and fund an ongoing income for your family.

Income protection

Income protection insurance provides you with up to 75% of your usual salary in a monthly payment if you have an accident or suffer an illness that means you’re unable to work, or only work in a reduced capacity, so you can:

  • keep making loan repayments
  • stay on top of household expenses, and
  • continue to generate savings for your future.

When considering your personal situation, you may choose to increase the level of cover provided or you may add personal insurance if you do not have any. Or you may feel the level of cover you currently have is sufficient based on your situation and your requirements.

Keystart recommends that you seek your own independent financial advice prior to making any decisions about your financial needs.

Tax benefits of personal insurance through superannuation

It may be more tax efficient to have personal insurance through your super, especially if you are earning in excess of $37,000 pa. To show you the impact, we’ll assume a basic example with a personal insurance premium of $1,000 per year (provided for illustrative purposes only).  The amount of the premium will depend on the level of cover you choose.

Funding personal insurance cover if you earn between $37,000 pa - $87,000 pa

 Premium paid within superannuationPremium paid out of after tax income
Insurance premium$1,000 pa$1,000 pa
Tax*$150 pa (superannuation contributions tax)$325 pa (marginal tax rate)
Income needed to pay insurance premiums$1,150 pa$1,325 pa

*Does not include Medicare levy and/or surcharge

Funding insurance cover if you earn between $87,000 pa - $180,000 pa

 Premium paid within superannuationPremium paid out of after tax income
Insurance premium$1,000 pa$1,000 pa
Tax*$150 pa (superannuation contributions tax)$370 pa (marginal tax rate)
Income needed to pay insurance premiums$1,150 pa$1,370 pa

*Does not include Medicare levy and/or surcharge

Important points to consider

Availability

Not all super funds offer the opportunity to add all three types of personal insurance. You may choose to increase cover in one or all three types of cover.

Salary sacrifice to cover premium?

You may choose to cover these premiums in your super by paying a salary sacrifice amount. If you do not salary sacrifice then the premiums may reduce your super account balance, resulting in less for retirement.

Check policy details  

If you have multiple income protection insurance policies (inside and outside of superannuation) then you may not be paid out on all of them and therefore you may be paying for cover that you may not be able to claim on.

Insurance through superannuation, especially income protection cover, may provide different cover compared to products outside of superannuation, and may be of a lower quality.

It may take longer for beneficiaries to be paid out of superannuation. For lump sum benefit payments the insurance company normally pays the superannuation trustee, who then pays the superannuation beneficiaries, which can result in delays.

*Keystart recommends that you seek your own independent financial advice prior to making any decisions about your financial needs. The examples given in this post are provided for illustrative purposes only. 

Keystart recommends that you seek your own independent financial advice prior to making any decisions about your financial needs. Any examples given in this post are provided for illustrative purposes only.