Using your super to pay your insurance costs
Updated: Jun 25, 2020
When I first meet with clients I'll ask a lot of questions so I can understand their situation. I want to know what's important to them so I can focus on that.
One of the questions I'll ask regularly is what their understanding is about the areas they want help in because I genuinely want to know what they know. I find this is a good base to work from and so do they.
As it turns out, there are generally three types of responses I get;
I don't know anything and I just want your help
I know a little but need more information
I'm confident in what I know and I'm going to test your knowledge
Most clients I meet with fall into category Number 1 with a scattering in Number 2. They just want to know which is the right way for them to go. This is especially true when it comes to their personal risk insurance - in particular the types of cover available, the benefits they provide and the options of how they can pay for their insurance costs.
One of the areas in which there are some strong views by Financial Advisers and by regulators such as ASIC is the role of superannuation to help pay for the costs of personal risk insurances. There are generally two schools of thought here;
Some hold the view that a client's super is taboo, untouchable and is for access in retirement only. They purely recommend the use of personal cash flow to support the costs of insurance protection - even if this means they have to go without something to get it.
Some consider the client's specific need for insurance protection today, their personal cash flow position and what the overall goal for their financial planning needs are now and in retirement is. They'll recommend the use of super to help fund insurance costs if it fits an overall plan and can be demonstrated.
This could be an endless debate for those that love endless debates so let's just look at some of the disadvantages and advantages of both. It's not an exhaustive or technical list but will give you some key points to consider;
Disadvantages of using your super
Using your super to pay for your insurance costs today will erode your retirement balance. This is the biggest point.
Holding your insurance in your own name, and paying for it from your personal cash flow, gives you more control over when the benefit is paid and who it is paid to rather than it is if you're using your super.
Income Protection insurance premiums paid for using your personal cashflow are tax-deductible. If you pay a lot of tax then this could be a nice advantage to have.
There is more complexity in meeting the rules of superannuation held policies ie: policy definitions for Total & Permanent Disablement (TPD). Paying with your own money can avoid this.
Funds removed from super to pay for insurance costs are removed from a tax-effective investment environment. This means you have to contribute more in the years ahead to make up the shortfall in your retirement balance or find another tax-effective investment as an alternative.
Advantages of using your super
Most people consider insurance at major life events such as marriage, having children or taking on debt commitment such as a home or investment loan. This usually means that their personal cash flow is tight during these times and using super may be the only reasonable solution for the time being.
Superannuation owned insurance policies attract a 15% super tax rebate which effectively offsets the costs of your insurance policies. This makes insurance costs more attractive.
Frees up your personal cash flow so that you can afford to hold a level of valuable medical trauma insurance which may not be affordable otherwise. Medical trauma insurance is an 'unsung hero' and one that is not available to be paid for using your super so having some cash flow freed up to get this type of protection is a strategic win.
Frees up your personal cash flow to invest in other asset classes, such as residential investment property, that allow you to borrow from a lender, to obtain tax-advantages and most importantly, grow your wealth over time. This enables you to create an alternative retirement balance outside of superannuation.
You can start to make additional before-tax super contributions through salary sacrifice with your employer once your personal cash flow is in a stronger position. This will close the retirement balance gap created by using your super to pay for insurance costs.
Insurance companies have flexible policy structures that create a strong benefit for you when you arrange the costs to come from a majority of super funds and a with a small personal cashflow component. This is a 'best of both worlds' arrangement.
Personally, I'm a supporter of using super to help pay for the costs of my client's insurance protection - for many, this can mean the difference between being able to afford to have some protection for their family or having none.
But this comes with some caution as it's not a one-size-fits-all solution and there are many areas to be considered. You should always seek the advice of financial planning professional to help you understand the disadvantages and advantages of this for your own personal situation. Done well - it can be a winning strategy. Done wrong - then this would simply serve to remove your valuable retirement benefits from their rightful place.
If you use your super today to pay for your insurance but plan not to contribute to your retirement - through additional super contributions or through other investments - then you're retirement balance is going to come up short.
Work with a Financial Adviser who will take these factors into consideration.
Shaun O'Keefeis a fee-based financial planner serving the families of the Peregian community. He specialises in retirement planning advice, SMSF, superannuation and life insurance along with strategies for UK QROPS pension transfer and estate planning. His major focus is helping his clients set themselves up to build and successfully transfer their wealth between the generations. Subscribe