Understanding insurance cover available within superannuation means you can better determine which is most appropriate for your clients.
Insurance through super is designed to protect your clients’ most valuable asset – themselves. That’s why having the right cover is crucial when it comes to a securing your clients’ financial future. This article, proudly sponsored by Russell Investments, examines the role of insurance inside superannuation.
As well as being a tax effective savings vehicle, superannuation can provide access to cost effective insurance cover for your clients. However, it’s always good to assess what’s available through each client’s super fund to ensure it is sufficient to meets their needs.
If the insurance with superannuation has been established for a number of years, your client may have experienced significant life changes since: a change in relationship status or work status, new dependents, a blended family or a milestone birthday. Each of these changes can impact insurance needs and in some cases, entitlements.
Insurance in super should be assessed alongside other insurance policies the client may hold. Is there sufficient coverage? Too little or too much? Is it the right sort of coverage? If there’s too little, should you look to increase their coverage inside or outside of super? If too much, which policy should be reduced or cancelled?
Insurance in super
Types of coverage
The insurance plans inside super generally provides three types of coverage:
- Death cover, which pays a lump sum in the event of your client’s death or the diagnosis of a terminal illness
- Total and Permanent Disablement (TPD) cover, which pays a lump sum if your client becomes totally and permanently disabled and is unlikely to work again in a job they are reasonably qualified for by education, training and experience
- Income Protection, which provides a replacement income – generally a percentage of the client’s current income – for a specified period if the client is unable to work due to illness or injury.
Super rules around insurance
Rules were introduced during 2019-2020 to ensure that super premiums were not inappropriately eroding retirement savings, especially on low balance accounts. Known as the ‘Protecting Your Super’ and ‘Putting Members’ Interests First’ these laws mean that:
- from 1 July 2019, super funds are required to cancel insurance cover on inactive accounts. An account is inactive if it has not received a contribution or rollover for 16 months
- from 1 April 2020, members aged under 25 or who have less than $6,000 in their account when they join, do not receive automatic insurance.
If eligible, your client may receive automatic insurance cover; however it’s important to note that the type and level of automatic cover varies. The client may also be able to apply for increased cover or a type of cover they don’t already hold. This conversation provides you with the ideal opportunity to review the client’s insurance needs and determine the optimum coverage, which may include a mix of insurance held within and outside superannuation.
Eligible members can ‘opt-in’ to turn on insurance cover before they turn 25 years old, if their super account balance is at least $6,000. They can also ‘opt in’ to retain insurance cover, even if a contribution or rollover has not been received into their super account in 16 months.
If your client is a defined benefit member, or their insurance premiums are paid in full by their employer, insurance cover is generally automatic. However, it’s worth having your client check their insurance status within the fund to ensure existence and extent of coverage.
Insurance and multiple funds
There may be scenarios where a client holds more than one super fund. If that’s the case, they are generally able to hold insurance through multiple accounts and may be able to claim Death or TPD benefits on these insurance policies. However, Income Protection benefits generally cannot be claimed on multiple policies.
TPD insurance cover in super usually ends at age 65. Life cover usually ends at age 70. Outside of super, coverage generally varies between insurance providers.
Insurance on inactive super accounts
Under the law, super funds will cancel insurance on inactive super accounts that haven’t received contributions for at least 16 months. In addition, super funds may have their own rules that require the cancellation of insurance on super accounts where balances are too low. The super fund will generally contact your client if their insurance coverage is about to end.
If your client wants to keep insurance within the superannuation environment, they will need to inform their super fund of their wishes or make a contribution to that super account. Clients may want to keep their insurance if:
- they don’t have insurance through another super fund or insurer
- it is more cost effective or provides better coverage than through an alternative insurer.
The pros and cons of insurance through super
As with anything, there are a range of pros and cons associated with insurance coverage via super.
Pros
People power
Because a super fund can purchase insurance on behalf of a large group of people, the fund is better placed to negotiate competitive prices for quality insurance benefits on behalf of members. This often results in cheaper premiums than may be possible outside super.
Easy to pay
Insurance fees are usually deducted from your client’s super balance or in some cases, by the client’s employer. The automatic deductions of insurance may make the premiums easier to manage and means that your client won’t be accessing their take-home pay to meet them.
Tax effective
Insurance fees that come from a super account are effectively deducted from pre-tax income, which could be a cost saving to paying for insurance fees outside super from your client’s after-tax income. In most instances, your client’s nett salary will be taxed at a higher marginal tax rate than that paid on super.
Easier to get cover
Most super funds will accept members for a default level of cover without health checks. This can be useful if for those clients who work in high-risk job settings or have existing health conditions that can make it difficult to get insurance outside super.
Increased cover
It is generally possible to increase the amount of insurance coverage above the default level, although this usually necessitates answering questions about medical history and a medical check.
An extra layer of protection
In most instances, if a claim is rejected by an insurer, it will go to the trustee of the super fund to be reviewed again.
Cons
Limited cover
The amount of cover available through super is often lower than the coverage available outside super. Default insurance through super isn’t specific to your clients’ circumstances and some eligibility requirements may apply.
Cover can end
If your client changes super funds or ceases contributions to their super so their account becomes inactive, their cover may end. It’s also important to note that cover through super often ends when the client reaches a certain age, usually 65 or 70 – this is generally different to cover held outside of a super account.
May reduce super balance
Insurance premiums are deducted from your client’s super balance. This reduces their retirement savings. As such, it’s important to ensure the insurance premiums aren’t eroding their balance – depending on a client’s circumstances, they may be better off meeting their insurance needs outside of super.
Claims may be taxed
Where insurance benefits are paid to people who aren’t your clients’ dependants, they’ll generally be taxed according to their marginal tax rate. Depending on the client’s age, taxes may be applied to Total and Permanent Disablement benefits.
Claim waiting times
Claim money is normally paid by the insurer to the trustee of the super fund before it’s paid to your client or their dependants. As such, payments may sometimes take longer.
Nominating beneficiaries
Your clients are able to nominate who will receive their superannuation benefit in the event of their death…this is called a beneficiary nomination. This way, they can be sure any insurance claims, or excess superannuation moneys at death, are distributed according to their wishes.
Who can be nominated as a beneficiary?
Beneficiaries of super entitlements and/or insurance claims fall into two groups. They are:
- the client’s dependants
- a legal representative or estate.
Dependants may include:
- your client’s spouse, including de facto of the same or different gender
- your client’s children, including step, adopted, and ex-nuptial children, or a child of your client’s spouse
- any person who is financially dependent on your client
- any person with whom the client has an interdependency relationship; this may include:
- a person with whom the client has a close personal relationship and lives with, where the client or other party provides ongoing financial support, domestic support and personal care, and
- any person with whom the client has a close personal relationship where, because of a disability, the above requirements of living together, financial support, domestic support and personal care are not able to be satisfied.
Your client may nominate a legal personal representative, such as the executor or administrator of their estate, or the estate. If this approach is taken, any insurance claim or super benefit will be paid into the client’s estate and distributed according to their Will.
When making decisions as to how to nominate beneficiaries, it’s important to point out to clients that payments made to their estate can be subject to family provision claims (challenges to the Will) and to any claims from your client’s creditors.
Conversely, any payment made directly from a super fund to a dependant cannot be subjected to these claims.
Different types of nominations
There are two types of beneficiary nominations:
Preferred nomination
A preferred nomination is not binding. If your client dies, the Trustee will collect all the relevant information about your client’s personal situation before deciding who the benefit should be paid to. The Trustee will consider the wishes your client expressed in their nomination as part of this process. However, it is possible that the client’s benefit will not be paid as they had nominated.
Binding nomination
In this instance, the Trustee is bound by your client’s nomination, as long as it remains valid. This means the benefit will be paid as your client instructs. A binding nomination can result in a faster payment because the Trustee must simply confirm that your client’s nomination is valid and collect certain administrative documentation before paying their benefit.
Importantly, binding nominations expire every three years. If the binding nomination expires, the nomination remains in place, but becomes a preferred nomination.
Your clients should update their nomination at least every three years to keep it binding, and at any time their circumstances change.
Case study: Nomination
Tom nominates his current spouse as a preferred beneficiary to receive his full benefit. Before his death, Tom and his spouse separate, and he forms a new de-facto relationship. A child is born from the new relationship. Tom has not updated his beneficiary nomination and is still legally married.
When the Trustee considers Tom’s personal situation and nomination, it is decided that it is no longer appropriate to pay his full benefit to his spouse. Instead the benefit is split between his de-facto partner, child and the separated spouse.
Let’s consider the same example as a binding nomination:
If this was a binding nomination, when the Trustee considers Tom’s nomination, it is found that it is still valid. Tom is still legally married, and therefore his separated spouse is a dependant. His benefit must be paid to his spouse, and his de-facto partner and child receive nothing.
Keeping nominations up-to-date
It is important that your clients keep their nominations up-to-date, so the right people receive the benefit. This is particularly relevant after a significant life change.
A binding nomination can be effective, because your client can be certain as to how their benefit will be paid and it can be processed quickly. The downside is that if your client has not updated their nomination as circumstances change, it may no longer best reflect their wishes.
While superannuation in insurance is a great option for many people, it may not suit everyone. As with insurance outside of super, each provider may have different rules, benefits and coverage. It’s important that clients check the insurance options before changing super funds – a pre-existing medical condition, age or work type may mean they’re unable to get the cover they want.
When reviewing insurance in super, it’s important to see if there are any exclusions, or if the client is paying a loading on their premiums, something generally charged to ‘higher risk’ people. It’s possible a risk factor may have been incorrectly allocated to your client.
As noted earlier in this article, insurance in super should be assessed alongside other insurance policies the client may hold to ensure there is sufficient coverage to meet their needs and the needs of their dependents. A review of a client’s insurance within super presents a good opportunity to provide a holistic review of their insurance needs.