We all know insurance is an important part of any financial plan. The burning question is: should you arrange cover inside or outside of your super fund?
Personal insurance helps to protect your quality of life and provide support for your loved ones if you get hurt, can’t work as a result of an injury or worse, lose your life.
We often hear how important it is to ensure you have sufficient cover. But it’s just as important to be smart about structuring your insurance so that the dollars you pay for premiums work harder for you.
Taking insurance through super
Standard insurance through super generally covers your life and pays a lump sum if you’re totally and permanently disabled. Your employer may arrange your cover automatically, which means you don’t need to have a medical examination or fill in forms.
If you take out insurance within your super fund your insurance premium payments can be deducted from your super contributions. So with insurance through super you’re effectively paying for cover with pre-tax dollars. If you were to take a similar level of cover outside super it would cost more as you’d be paying premiums with after-tax dollars.
As the table shows, the higher your marginal tax rate, the bigger the potential saving.
Example: cost of a $1,000 insurance premium inside and outside super
| Taxable income more than: | Marginal tax rate (includes Medicare levy) |
Pre-tax cost outside super |
Pre-tax cost in Super* |
| $37,000 | 31.5% | $1,460 | $1,000 |
| $80,000 | 38.5% | $1,626 | |
| $180,000 | 46.5% | $1,869 |
Source: BTFG Life Insurance.*Assumes insurance is arranged through a taxed super fund. Premiums are deductible in the fund’s tax return and effectively offset any tax payable on the contributions.
As premiums are generally cheaper inside super, you could choose a higher level of cover than you may consider when choosing insurance outside super. However it’s important to remember that the higher your premium, the less money you’re investing in your super.
Using a salary sacrifice strategy to cover the premiums could help bridge this gap. For example, if your premiums are $400 per month and you arrange with your employer to salary sacrifice $400 per month to your super fund, you still pay the premiums using pre-tax dollars. You also maintain the same level of investment into your super.
What about insurance outside super?
Depending on your individual situation this strategy may suit but it’s important to get expert financial advice. Here’s a look at some plus points about insurance outside super.
1. Avoid delay in getting benefits: As your super fund is designed to provide you with savings for when you retire, it’s harder to access your money. Any insurance benefit you’re entitled to is paid to your super fund, not to you directly. Sometimes this could mean a delay in getting your money. That’s why some types of insurance (such as cover for trauma) are arranged outside of super.
2. Protecting your income: You can claim a personal tax deduction for premiums for insurance to protect your income. As there’s no tax advantage in arranging this type of insurance through super, it’s generally arranged outside of super.
3. Making the most of your contributions cap: Pre-tax super contributions are taxed at the concessional rate of 15%. At present, these ‘concessional’ contributions are limited to $25,000 per year if you’re under 50, and $50,000 if you’re 50 or over. Depending on your circumstances, it may be more tax-effective to organise insurance outside super instead of diverting contributions to cover insurance premiums.
For example, if you’re 48 years old with a sizeable insurance policy through super and you’re paying $10,000 in premiums, the amount you can contribute towards your super within your cap is effectively reduced from $25,000 to just $15,000. Any additional contributions above this cap would be taxed at 31.5% in addition to the 15% concessional tax already paid.
Get expert advice
Insurance both inside and outside of super has its advantages, but it does need to be tailored to your personal circumstances and needs. Talk to us today about how to structure your insurance cover effectively for you.
Hey, Jessica here – Did you enjoy my latest article? Do you have any questions or Feedback for me? Call me on (02) 9266 2269 or Book an Appointment online.
Remember that our first meeting is cost and obligation free.
