Dec 10, 2018Insights

Key things you need to know about Insurance in super

Key things you need to know about Insurance in super

If you run a self-managed superannuation fund (SMSF), the law says you must consider the insurance needs of the members of the fund when preparing the fund’s investment strategy.  This doesn’t necessarily mean that you must take out insurance cover for the members of the fund, but you must consider the insurance needs as part of your management and administration of the fund.

The types of insurance or the level of cover is not mandated however as part of the review it would be wise to consider the age and personal circumstances of each of the fund members as this may have a bearing on the types of insurance that may be relevant.    Types of insurance cover that may be applicable include:

  • Life insurance
  • Total and permanent disability insurance (TPD)
  • Income protection insurance

In most cases, these types of insurance can be arranged either outside, or within the super environment, including an SMSF.  However there are a number of factors to consider when it comes to deciding whether insurance cover within, or outside of the super environment is right for you.

Key benefits of insurance held within super:

Cost. Insurance offered within many super funds is based on group rates, so it may be more attractive from a cost perspective than securing the same type of cover outside the super environment.

It’s tax-effective. When you take out insurance cover within super, insurance premiums are deducted from your super fund, rather than from your after-tax income. 

Easy to establish. Most super funds offer a standard level of cover without the need to undergo a medical examination. This can be advantageous if you have any health issues.

Things to look out for when insurance is held within super:

Adequacy of cover.  While most super funds offer a standard or basic level of insurance cover, you may find that this is not sufficient for the fund members’ needs.  Therefore you may need to secure additional cover either within or outside the super environment to make up any shortfall.

Delays in receiving payments. In the event of a claim, insurance payouts go to the superannuation fund in the first instance before they are transferred to the beneficiary. The superannuation fund trustee determines the correct beneficiary before funds are released. This can often lead to delays in insurance proceeds being received.

Beneficiaries aren’t binding. As the superannuation fund trustee is responsible for determining the correct beneficiary or beneficiaries, there are no guarantees that the intended beneficiary will receive the funds in the event of a death benefit claim. You may be able to nominate a binding beneficiary however there are some limitations as to who can be nominated.

Taxation considerations. If your beneficiaries are financially dependent on you, such as your spouse or any children under 18 years of age, the lump sum will be paid tax-free. However if death benefits are paid to someone who isn’t financially dependent on you the proceeds may be subject to tax.


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