Insurance through super – with choice comes complexity

Recent changes to superannuation legislation present exciting opportunities when it comes to ways of funding life insurance. With choice, however, comes complexity and the challenge is to isolate the benefits offered by the various funding alternatives.

Behind the scenes

The story behind widening the choice for consumers involves two key factors.

Firstly, recent changes to the superannuation regulations introduced a new obligation for super fund trustees to respond to requests from members to roll over funds to another super fund within specific timeframes. This measure was introduced by the Government to give consumers freedom of choice as to the location and spread of their superannuation money.

The second factor is the use of contributions tax rebates. Superannuation funds generally receive a tax deduction for life insurance premiums. Many super funds are now passing that benefit on to the contributing member, allowing the member to reduce the cost of their life insurance cover.

The combination of these two features may provide you with the opportunity to reduce your costs. If your life insurance needs are not being met by your existing superannuation fund, you can access more suitable life insurance cover via another super fund. It is now possible to fund the life insurance by a rollover from your existing fund. The amount rolled over may also be reduced by a 15 per cent tax rebate, delivering a substantial reduction in the cost of your new life insurance arrangements.

But there are considerations…

Before you commit to going down this new path, you should ensure that this option is best suited to your circumstances. You should consider the following three points:

• Erosion of retirement savings. There is no free lunch. The use of accumulated balances in your existing superannuation fund to finance your life insurance needs will reduce retirement savings.
• You may be able to fund the contributions to your life insurance superannuation fund by contributions from your employer under a salary sacrifice arrangement. In this case, as you receive the tax benefit via the salary sacrifice arrangement, you will not be eligible to receive a contributions tax rebate.

• If you are self-employed, the funding of life insurance needs via a tax deductible personal contribution into super fund may be more efficient. In this case, as you would receive the benefit of a tax deduction for your superannuation contributions, you would not be eligible for the contributions tax rebate.

• If you have a self-managed superannuation fund (SMSF), the optimum insurance solution may be to continue the traditional financing structure. Under this structure, the trustee of the SMSF owns the life insurance policy, and can access the benefit of any tax deduction associated with the premium. Introducing the complexity of a rollover arrangement may not deliver any additional benefit.

The way forward

The broadening of insurance payment options now gives you a substantial opportunity to ensure that your life insurance arrangements are completed on the most cost effective basis.

If you are eligible for this rebate, and a rollover provides a definitive advantage, all that’s left is to make sure you are comfortable dipping into retirement savings to pay for peace of mind today.

For more information about insurance through super, speak to your financial planner.

Source: TAL