Insurance can be complex, especially when it comes to the superannuation environment. Here we explore insurances that can be held inside and outside super and some considerations for small business owners when it comes to ensuring they have the appropriate cover in place.
Insurance inside super: pros and cons
There are a number of advantages of holding insurance inside your super fund as a small business owner. For instance, it can be advantageous from a cash flow perspective given premiums can be paid for through funds held in the account.
But it’s important to understand there are limitations to the type of insurance that can be held in the super environment. For example, it’s not possible to hold the most comprehensive type of total and permanent disability (TPD) insurance – covering you from being disabled from your own occupation – inside the superannuation environment.
Another consideration is that whilst insurance is held inside a super fund, if you were to make a claim on the policy, the funds remain inside superannuation until you meet a condition of release under the Superannuation Industry Supervision (SIS) Act. There could be times where you may meet the insurance definition for claim but not the SIS condition of release resulting in a super member not being able to access the proceeds from the insurance claim until retirement.
“Even a slight decline in health can impact the ability to successfully apply for insurance”
“It’s for this reason that certain types of insurance such as trauma insurance and more comprehensive income protection insurance are not available under super ownership,” explains Daniel Orrell, Chief Distribution Officer for Steadfast Life.
“If there is going to be a question mark over whether you’ll be able to access your benefit after a claim, consider removing that ambiguity altogether and housing it all outside super,” he suggests.
In the market
It’s also important to remember that premiums for life insurance policies are also subject to both age – based increases every year as well rate increases from the insurer.
“When people receive their super statement each year, they typically just look at the balance and don’t think to look at how their insurance premiums may have changed over the course of the year. Whereas outside the super environment, people tend to look more closely at how premiums have changed as they usually have to pay the premium following a renewal notice and invoice from the insurer” Orrell says.
A recent federal government initiative intended to ensure people don’t have insurance in super unnecessarily or without knowing saw insurance in super funds cancelled where fund holders weren’t actively contributing to the account and didn’t “opt in” to keeping the cover. This can be a trap for small business owners or sole traders who don’t have to contribute to their super fund resulting in their cover being cancelled and needing to reapply for their insurance, which can be subject to medicals depending on the levels of cover being applied for. Even a slight decline in health can impact the ability to successfully apply for insurance.
“This is just another reason why it’s important to consider your options around whether or not keeping insurance inside your super fund is the most ideal solution for you,” he says.
The message to small business owners is to speak to your insurance broker about whether or not your superannuation fund being the policyholder for the insurance is appropriate for your circumstances. Because you don’t want to be in a position where you’re not comprehensively covered just for the convenience of using superannuation to manage cash flow.
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