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.
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 may be reduced, especially 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 or changing your insurance – it can be hard to get the same insurance at the same price later down the track. And your existing insurance cover (including type, amount and cost of cover) may be linked to current or previous employment and may no longer be available or you may need to go through an underwriting process.
Check our things worth considering section below.
Types of insurance provided through AMP Super accounts*
Life insurance
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.
Total and permanent disablement (TPD)
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.
Temporary salary continuance (IP)
Your ability to earn an income is likely to be one of your most valuable assets in life.
IP, 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.
*The name of your insurance cover may differ depending on your super product but will relate to one of the three types of cover available through AMP Super. Log in to your account to view your Insurance details or refer to your account statement to view your current cover.
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.
Insurance erosion
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, change over time or as a result of increase in age as well as certain events such 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 your 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.
Applying for a higher amount of insurance
If you’re not sure how much insurance you might need, 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-effective1 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).
1 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.
- 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.
Need help?
There’s a lot to think about when it comes to super and insurance so it’s a good idea to speak with your adviser to work out what’s right for you. Give us a call on 131 267 - Monday to Friday, 8.30am – 6pm (Sydney time). Or, if you don’t have an adviser, we can help you find one.
Examples
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 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.
Jason held $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 held 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.
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 opened her AMP Super account, she applied for $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 has now 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 her 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.
Important information
Products in the AMP Super Fund and the Wealth Personal Superannuation and Pension Fund are issued by N.M. Superannuation Proprietary Limited (N.M. Super) ABN 31 008 428 322 (trustee), which is part of the AMP group (AMP). Before deciding what’s right for you, it’s important to consider your particular circumstances and read the relevant Product Disclosure Statement, Target Market Determination or Terms and Conditions available from AMP at amp.com.au or by calling 131 267. Read AMP’s Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.
Any advice and information provided is general in nature, hasn’t taken your circumstances into account, and is provided by AWM Services Pty Ltd ABN 15 139 353 496 (AWM Services), which is part of the AMP group (AMP). All information on this website is subject to change without notice.