Evaluating the Pros and Cons of Super Fund Insurance: Is It the Right Choice for You?
Insurance is one of those areas many of us overlook—until we need it. When it comes to securing your financial future, having adequate insurance is essential. One of the easiest and often most cost-effective ways to get insurance is through your superannuation fund. However, as with any financial product, there are pros and cons to consider when comparing insurance inside and outside your super fund.
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Insurance Inside Super
Most Australians have insurance included as part of their superannuation. Typically, this covers life insurance, total and permanent disability (TPD), and income protection. The premiums for these policies are automatically deducted from your super contributions, which means it doesn’t affect your take-home pay.
Pros:
- Cost-Effective: Group insurance through your super can be cheaper because super funds can negotiate bulk discounts on behalf of members.
- Automatic Coverage: Many funds provide default insurance, meaning you have some level of coverage without having to actively seek it out.
- Tax Advantages: Since your super contributions are taxed at a lower rate (usually 15%), the cost of insurance through your super is tax-effective.
Cons:
- Limited Coverage: Default insurance inside super may not provide enough coverage to meet your individual needs. The cover levels are often lower than what you might find outside super.
- Erosion of Super Balance: Since premiums are deducted from your super account, they reduce the amount of money available for your retirement. Over time, this can have a significant impact, especially if you aren’t making additional contributions to offset the cost.
- Limited Access to Benefits: If you make a claim, the payout is generally tied to superannuation regulations. This can restrict when and how you access the funds, especially before you retire.
Insurance Outside Super
Taking out insurance outside of your super fund gives you more flexibility in tailoring your cover to your specific needs, but it also comes with its own set of considerations.
Pros:
- Tailored Coverage: Outside of super, you can select higher levels of cover and additional options that suit your individual circumstances better than default policies within a super fund.
- Quicker Payouts: Claims are generally processed more quickly, and you have direct access to the funds without having to go through the restrictions of superannuation law.
- Maintain Super Balance: Since the premiums aren’t deducted from your super balance, your retirement savings remain intact.
Cons:
- Higher Premiums: Individually purchased insurance is often more expensive than the group policies offered through super.
- No Tax Advantages: You’ll pay for your insurance premiums from your after-tax income, which can be more expensive in the long run.
- Impact on Cash Flow: Since premiums are deducted from your income, they can affect your day-to-day cash flow, particularly if you’re already stretched financially.
Talk to a Specialist
Deciding whether to keep your insurance inside or outside your super fund depends on your individual circumstances. Consider your current financial situation, your retirement goals, and how much coverage you realistically need. It’s always worth consulting with a specialist insurance adviser to ensure you’re making the best decision for your needs.
If you’re thinking about switching or cancelling your insurance through your super, be cautious. Cancelling without securing an alternative could leave you uninsured, particularly if you have pre-existing conditions that could affect your ability to get coverage elsewhere.
As the cost-of-living crisis continues to strain many Australians, learn these 5 Essential Tips to Help Australians Manage their Personal Finances. And as you enter your silver years, here is How to Avoid the Biggest Money Regrets in Your 50s.
