Many superannuation plans include insurance as part of their offer. It’s often seen as an added benefit that can help in times of need. Insurance paid through super is a tax effective way to protect you and your family should anything happen to you.
You may have decided to take out insurance cover after a conversation with your adviser, or you may have acquired insurance cover as part of a previous employer plan, and when you left that employment you retained your insurance cover.
Further information on insurance inside super, including tools and resources, are available through the Australian Government’s MoneySmart website here.
What is insurance inside super?
Insurance inside super is usually offered through your employer’s super plan as cover they’ve negotiated for you and their other employees. This is called a group insurance policy and is generally considered the number one way for Australians to access affordable insurance without needing underwriting1.
How it works
Your insurance premiums get paid out of the money in your super account. This can be good for your budget, because the cost doesn’t reduce your take-home pay, and super is generally taxed at a lower rate than income tax (so you’re saving there too).
But it also means the balance in your super account will be reduced, if you don’t keep making super contributions. This is a good thing to keep in mind if you ever take a long-time off work. But you may not want to be too hasty with cancelling your insurance – it can be hard to get the same insurance at the same price later down the track.
How super rules have changed
In the past, insurance inside super was generally provided automatically to anyone who signed up to their employer’s super plan (this is sometimes called default cover because members don’t need to answer health or lifestyle questions to get covered).
Rules around this changed on 1 April 2020, with updates to super laws. These laws aim to protect certain super accounts from being eroded by the costs of insurance that some people may not want. As a result, to be eligible to receive automatic (default) insurance with your employer super plan, you must now:
- be 25 years old or over,
- have a balance of at least $6,000 in your super account, and
- not have an inactive2 super account.
In most cases, as soon as you meet these eligibility requirements, your insurance will be applied automatically (but you’ll be given the chance to tell us if you don’t want it).
With AMP super accounts, if you’re not eligible to receive automatic cover, and you’d like the insurance your employer has negotiated for you, simply tell us you want it. If you do this in the first 120 days of starting with your employer, you won’t have to answer health or lifestyle questions. Find out more.
Types of insurance provided through AMP super accounts
||Total and permanent disablement (TPD)||Temporary salary continuance (TSC)|
Sometimes called death cover, life insurance works by providing a lump-sum payment to your super account if you pass-away or become terminally ill.
It can be used to help support your loved ones financially, with costs like a mortgage, or other debts as well as your family’s future expenses to help maintain their lifestyle when they need it most. So, it’s important to consider who your super benefits will go to if you pass-away.
TPD cover provides you with a lump-sum payment if you suffer a disability that prevents you from ever working again.
This cover could help you pay for ongoing medical expenses, alterations to your home to make day-to-day life easier and help provide future financial stability.
TPD is generally only available if you also take life insurance and normally, the amount of your life insurance cover will be reduced by the amount of any TPD claim that is paid.
Your ability to earn an income is likely to be one of your most valuable assets in life.
TSC, also known as income protection, is designed to pay a monthly benefit of up to 75% of your pre-disability regular income if you’re unable to work due to injury or illness.
Typically, within super, income protection provides you with cover either for a two-year or five-year period or until you turn 65, depending on the terms in your employer plan.
Understand your insurance needs
As life changes, your insurance needs may too. It’s important to keep reviewing your cover to make sure it continues to be right for you. Here’s a simple check:
- Ask yourself how much money you, or your family, would have if you were to become disabled or pass away.
- Compare that with how much money your family might need in the same situation, including how they’d manage paying for day-to-day costs like food, power bills, child-care and mortgages.
- The difference between the two can give you some guidance for how much insurance you may need.
Your financial adviser can assist you with determining your insurance needs or alternatively you can use our insurance needs calculator.
It’s important to review your insurance regularly and make sure any premiums paid from your super account aren’t reducing your balance by more than necessary. This is called insurance erosion.
The superannuation industry’s generally held view is that annual insurance premiums should not exceed 1% of annual salary. For example, someone earning $50,000 per year shouldn’t pay more than $500 per year for insurance.
However, there’s a number of reasons why you might pay premiums that are greater than 1% of your annual salary. For example, you and your adviser have determined that you require higher levels of insurance cover which in turn costs more.
Reviewing your insurance needs
Insurance premiums paid from your super account may reduce your super balance over time. Many insurance arrangements, the amount and cost of cover may change over time or as a result of certain events such as increase in age as well as leaving your employer – which can result in changes to your premiums and level of cover. For this reason, you should regularly review your super accounts. You’ll need to check for insurance, including the cost of premiums and level of cover. And remember – one size doesn’t fit all. Speaking with an adviser may help you work out what’s right for you.
If you decide you’d like to reduce your insurance premiums by changing your cover, you should consider how that may affect you, or potentially your family, if you ever need to make a claim. You should also consider that if you reduce your cover now, you may not be able to increase it again in the future without going through underwriting. There is also a risk that through the underwriting process, the insurer may not agree to increase your cover.
View your insurance details
To understand if you have insurance inside your AMP super account, check your member statement or log into My AMP where you can:
See your super balance and how much is being contributed to your account
See details of your insurance cover
Update your personal information, beneficiaries and provide your tax file number
Compare, change and view your super investments
Applying for a higher amount of insurance
When you join your employer super plan, there’s generally a limited time where you may be able to apply for a higher level of insurance cover without needing to answer health and lifestyle questions. You can find out more in your product disclosure statement.
If you’re not sure how much insurance you might need, speaking with a financial adviser can help you understand what works for your circumstances.
Things worth considering
Below we have listed some of the common benefits and considerations of insurance inside super to help you get a better picture. Though it’s important to keep in mind that this is not tailored to your personal circumstances and there may be other things that you need to consider.
- The costs of insurance premiums come out of your super account, so you won’t be dipping into your take-home pay.
- If premiums are automatically deducted, your insurance may be easier to manage.
- It could be tax-effective3 because you pay for the insurance from your super contributions instead of your take-home (your take home pay is taxed at your marginal tax rate, which could be a higher rate than what your super is taxed at).
- After joining your employer, you may be able to apply for a higher level of insurance cover within a limited time, without needing to answer health and lifestyle questions.
- Insurance in employer super plans are generally more competitively priced than insurance outside super.
Considerations for insurance inside super
- Cover through super often ends when you reach a certain age (usually 65 or 70). That’s generally different to cover that’s outside a super account.
- Paying insurance premiums via your super account could decrease your super balance. See insurance erosion above.
- If you have two accounts with the same type of insurance, you may be paying for insurance you don’t need. In particular, for TSC (Income Protection), you will most likely only be able to claim up to 75% of your pre-disability income (offsets may apply), regardless of whether you hold it in two accounts.
- Where insurance benefits are paid to people who aren’t your dependants, they will be taxed according to their marginal tax rate.
- Taxes may be applied to TPD benefits depending on your age.
- Claim payments may take longer, as the money is normally paid by the insurer to the trustee of the super fund before it’s paid to you or your dependants.
Please note: These examples are made up, and everyone’s circumstances are different. Please consider your individual circumstances before deciding whether insurance inside super is right for you.
Jason’s insurance wasn’t giving him peace of mind
How it was worked out
The super account provided through Jason’s employer offers six units of life insurance and TPD cover.
One unit equals 2.5% x Jason’s salary x the number of years until Jason turns 65. So:
1 unit = (2.5% x $50,000) x 40, which is $50,000
6 units = $300,000
Because Jason felt his circumstances required more insurance than the $300,000 default amount, Jason increased his cover to $1.5m for peace of mind. The payments for this insurance come out of Jason’s super.
Jason is a 24-year-old IT manager who earns $50,000 a year. He has a home loan and twin newborn baby girls, so he’s keen to make sure his family is well-protected if something happens to him.
When Jason started his job, he wasn’t eligible to receive the insurance provided in his employer plan automatically, but he saw that he could request it in the first 120 days with no questions asked, which he did.
The amount of insurance cover he received was calculated using his salary and age, and equates to $300,000 of life insurance and TPD cover, at a cost of $201 a year (the premium is paid out of his super).
Jason was unsure if the amount of insurance provided through his super was enough to cover his liabilities and family, so he decided to check his insurance needs using the AMP insurance calculator.
The results of the calculator showed that his circumstances may require $1.5m of Life and TPD insurance.
On reflection, Jason decided this was a better option for his family, so he called AMP and asked to increase his cover to $1.5m at an annual cost of $1,005 in premiums.
Annual premiums worked out to be approximately 2% of Jason’s annual $50,000 salary, which is above the generally held view within the superannuation industry that annual insurance premiums should not exceed 1% of annual salary – however, Jason felt he needed additional cover and so he was comfortable with the additional costs.
Jason feels relieved that his family is financially protected if he dies or becomes too injured to be able to work.
Why Alena reduced her life and TPD insurance
How it was worked out
The super account provided through Alena’s employer offers six units of default life insurance and TPD cover.
One unit equals 2.5% x Alena’s salary x the number of years until Alena turns 65. So:
1 unit = (2.5% x $100,000) x 30, which is $75,000
6 units = $450,000
Alena also receives income protection at 50% of her salary.
Her current annual insurance fees are $315 for life insurance and TPD, $570 for income protection, totalling $885 per year.
Upon review, Alena decided to change her insurances to match her circumstances, so if she becomes too injured or sick to work for a long period, she’ll continue to have insurance to cover part of her salary. The new insurance payments of $1,030 per year will come out of her super.
Alena is a 30-year-old events manager earning $100,000 per year. She has no children, loves surfing and rents an apartment overlooking the beach.
When Alena started her job, she chose to sign up to her employer’s default AMP super account. It included $450,000 of life insurance and TPD cover, as well as $4,166 per month of income protection insurance and was calculated according to her age and salary. Alena’s annual insurance fees were $885.
Since Alena has no debts or dependants, she decided to review her insurance using the AMP insurance calculator. It suggested a lower amount of life and TPD cover, but a higher amount of income protection (75% of her salary).
Alena talked to the workplace financial adviser and decided to decrease her insurance to $250,000 of life and TPD insurance and increase her income protection to $6,250 per month. The annual fee for her new insurance amount costs $1,030 per year ($175 for life and TPD and $855 for income protection). which is approximately 1% of her annual income and so within the generally held view within the superannuation industry that annual insurance premiums should not exceed 1% of annual salary.
If Alena’s circumstances change down the track, she’s ready to review her insurance again, to make sure it continues to provide the cover she needs.
1 ‘Fiscal Impacts of Removing Insurance in Superannuation' Rice Warner 2018
2 An inactive account is a super account that has not received any contributions or rollovers for 16 months. Learn more at https://www.amp.com.au/insights/grow-my-wealth/protect-your-super-package
3 Taxation issues are complex and the decisions you make can affect the amount you receive at claim time. You should seek advice to determine whether holding insurance through super is appropriate for you. The insurance premiums are deducted from your super balance, reducing the money available for your retirement. If you are not making regular contributions to your super, the deduction of premiums may impact your retirement savings balance over time
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