16 Aug Three Issues With Holding Personal Insurance Cover In Super
It seems ideal to hold your insurance cover in super. If we can pay our insurance cover in super (in the background), that is one less bill we have to pay out of pocket.
However, there are some significant issues that you need to consider when it comes to holding your insurance cover in your super.
I want to say from the outset that this does not mean I would recommend holding all of your insurances from your bank account. If you wish and can do this, great!
What I would recommend is speaking to a financial planner (who is not employed by industry or bank super fund) who can analyse your situation and build a package for cover held both inside and outside of super.
Issue One – Legislative Differences
Most people are not aware that there are legislative differences between cover held inside of super and outside of super. The politicians set these differences in Canberra and not set by the product or super providers themselves.
These legislative differences can impact whether your claim will be successful or not, or whether you have to pay tax on your insurance payout or not.
In short, cover held outside of super is far superior to cover held in super. If you want a policy that has a significantly higher chance of being paid out, you need to look to hold the cover in your name.
Issue Two – Slower To Pay Out
Everyone likes an industry super fund because they have lower fees than their retail counterparts (although I would argue that is no longer true). However, one of the generally accepted frustrations of industry super funds is their administration is so slow! When you add an insurance claim on top of this, it can become even slower.
When you hold insurance in your name, it is only the insurance provider who has to decide whether your claim will be paid out or not. If the insurance company decides whether your claim will be successful based on the terms of the policy it is paid to your bank account which you can use as you please.
However, if your insurance cover is held in super, it is both the insurance provider AND the trustees of the super fund who decide whether your claim will be successful.
If you hold the cover in your super, the insurance company decides whether your claim will be successful based on the terms of the policy. If it is, it is then paid INTO YOUR SUPER ACCOUNT. Once it is in your super account, then the trustees of your super fund (who usually only meet once per month) determine whether your claim meets the legislative requirements of being able to pay out.
It is another step in the process which can add weeks, if not months, in your ability to successfully make a claim or not.
If you want to ensure your insurance policy is paid out quicker, I will look to hold the cover in your name.
Issue Three – Impact On Your Super
It is well documented that insurance premiums can have a detrimental impact on your super balance over the long term. I am not going to argue against this fact.
Does this mean you should fund your insurance cover from your bank account? Not necessarily.
At Master Your Money Now our recommendations will be personalised based on your unique circumstances. However I would generally recommend people hold most of their insurance cover in super to free up cash flow, but hold a bit of cover in their name to get better definitions of cover.
But what I would also recommend is making additional contributions to your super to fund your insurance premiums partially and to build up your long-term savings further. This can be done in a way where you either save tax or receive a payment from the government.
Confused As To What Is The Best Way To Go Forward?
Don’t worry you are not the only one. This is a very complex area of your finances, and you need to get it right. The consequences can be tax payable of $100,000+ or worse still your claim not being successful.
We want to help you build the best Plan B which is tailored to your circumstances. One that maximises your ability to make a claim but doesn’t cost an arm and a leg.
If this is a topic that you would like to discuss in more detail, please go to www.MasterYourMoneyNow.com.au/getstarted to book in your complimentary 30 minute strategy session.
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Disclaimer: This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs. Past performance does not guarantee future returns.
Chris Carlin is an Authorised Representative (No. 1235031 for financial services and No. 514748 for credit) and Master Your Money Now Pty Ltd ABN 65 627 229 681 is a Corporate Authorised Representative (No. 1265677 for financial services and No. 514747 for credit) of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523