Ways to buy and own life insurance
Insurance policies can be bought in one of 3 ways:
Through a financial adviser
Direct from an insurance company, or
Held inside your superannuation, which is the case for most Australians
No matter where you purchase it from, the core idea is the same: if something happens to you that is covered in your policy - you get paid an amount to support you through the difficult changes.
Some important differences you need to be aware of:
1. Insurance through an adviser is flexible and tailored to you
When you buy a policy through a financial adviser you’re buying the policy as an individual.
This can enable the product to be tailored to your personal needs and circumstances through both the financial advice process (which includes a detailed needs analysis), as well as an insurance process called underwriting. Combined, this ensures the amount you pay and the cover you have is just right for you.
Another benefit of buying through an adviser is they can help you access insurance policies that you can pay for through your super.
2. Insurance bought directly from an insurance company has some limited flexibility
Buying insurance directly from an insurance company (generally online) has a degree of flexibility to respond to your needs.
This can be effective if you have a clear understanding of your financial position, and a relatively simple insurance needs.
Direct insurance can sometimes be more cost-effective than insurance through an adviser (not always), but is generally more expensive than Group Insurance.
3. Group Insurance through a super fund is standardised, which can sometimes be great for a basic level of cover
Superannuation funds buy standardised insurance policies in bulk from insurers, and then offer them to their members to ensure a level of protection for their financial future.
This means that it is often a cheaper way to access a standard level of cover, and if you fit the fund’s criteria you’re guaranteed to get cover – up to a certain limit – without the medical checks which are usually required when applying for insurance outside super.
Group Insurance through super can be a cost-effective and tax-effective way to fund your premiums and access basic levels of cover that can, in some cases, be easily upgraded. However, there are some important limitations to consider:
It’s a minimal level of cover
The amount you’re covered for inside super may not be enough to provide the protection you need.
You can often top up your level of cover inside super, but there are limits on how much insurance you can get without a medical assessment.
It may take longer for your claim to be paid
When you claim on your insurance through super, the benefit is paid to the super fund first – in some cases slowing down the payment to you or your beneficiaries.
Income protection benefit payments may stop after two years
Benefit payments on income protection claims outside super often pay you up to the age of 65
Inside super, this benefit typically runs out after two years.
Not all cover types are available through super
Insurance such as trauma cover for you or your children, or own occupation TPD are not available under superannuation. This could potentially leave a gap in situations where a critical illness or injury occurs and immediate financial relief is needed.
Your retirement balance can be impacted
If you pay insurance premiums from your super contributions, that means there is a less money available to invest. Over a long period of time this could mean having less for retirement – especially when you consider the effect of compounding over time.
Your life insurance benefit payments might be taxed up to 32%
Generally, life cover payments for an insurance policy outside super are tax-free, regardless of who receives it.
In most circumstances, only dependants defined under the Superannuation Industry (Supervision) Act 1993 – which could be a spouse, a child under 18, or anyone shown to be financially dependent on the deceased – can receive the benefit tax-free.
It’s important to note that, generally, if the lump sum benefit is paid to anyone else, including an adult or a non-dependent child, it will be taxed up to 32%.