SMSF Insurance

 In Insurance, SMSF

Super Insurance Restrictions

It is an unchallenged belief of many Australians, that they do not need any stand alone insurance, as their super fund covers all their Life, TPD and income protection needs. While Insurance in super is cheaper, it often comes with a lot of conditions and very limited benefits. You typically get unitised cover based on age, income and profession, and it is usually only for $100,000 or $500,000 when in reality you may need closer to $750,000 to $1 million to protect you and your family. So here are some considerations for super life insurance cover arrangements

Research company super ratings,  published research in 2016 that indicated that an alarming 16% of super funds paid less than the amount of cover taken. Another 8% of super funds paid 61%- 70% of the life cover amounts taken out by members.

Total and Permanent Disability Claim payouts appear very alarming, based on super ratings research,

  • 28% of super funds paid 91% -100%
  • 12% of super funds, paid less than 60% of TPD cover amount
  • 15% paid 61%-70%
  • 20% paid 71%-80%
  • 24% paid 81%-90%

Income Protection or Salary Continuance insurance was another insurance product that represented very minimal claims, with just 47% of super funds paying 91%-100% of the cover value.Super Ratings, said that many super funds changed their insurance policy definitions and terms and conditions in 2016, with the impact yet to be quantified.

Advantages of Insurance in Super

  • No medical examinations are required to take out basic cover.
  • Super policies often include total and permanent disablement (TPD) and Salary continuance insurance.
  • Premiums can be deducted from super contributions

Disadvantages of relying on Insurance in Super

  • Cover could be less than you want or need.
  • You will need to meet a condition of release to access the benefits  for TPD and SCI (i.e.)  retired and of pension age.
  • You cannot claim a tax deduction personally
  • As the premiums are paid from your super, income protection( SCI) premiums erode retirement savings

Most Australians are unaware that insurance premiums in super are in the most part, funded by their employer super contributions ( 9.5% SGC) which is the mandatory amount paid by an employer. Insurance in super has limited benefits, such as a maximum cover amount without medical assessment and the inability to claim your benefit for , Salary continuance (income protection) cover as you need to meet a condition of release in super such as being fully retired or totally incapacitated or due to hardship, to access these insurance benefits. Structuring your insurance to suit your needs, so it is cost effective, it pays when you need it most and is  tax deductible, are some of the benefits of getting advice on your insurance cover needs. Salary continuance insurance is classic example of an insurance cover that has very little benefit when held in a super fund, as salary continuance insurance is only paid when you are sick or injured. Now if you are under the age of 60 and need to claim on your salary continuance, you will not be able to withdraw the benefit amount from your super as you will not be able to qualify under the allowable SIS Act conditions of release in super.

It must be said that group insurance in super funds ( retail & industry)Provide a valuable service for many middle to low income Australians who cannot afford to obtain independent cover. This  insurance is typically subsidized, however it must be said that the payout ratio’s for group super insurance cover and particularly insurance held with industry funds is alarmingly low.

This graph highlights that there were 1,010 claims or a percentage of (71%) of claims accepted by FOS,  in 2016-17 financial year . Income protection cover was the reason for 30% of complaints lodged with FOS, which were denied by insurance companies. The fact that these complaints were lodged directly with FOS, suggests that no advice was sort and that online providers and super funds would have been the largest culprits. Insurance in super is an important protection mechanism for Australian households, but too many Australians neglect this cover,preferring instead to fund insurance via their super to reduce costs,without realising the benefits and the impact of insurance costs, which can erode super savings, intended for retirement. The impact of poorly structured insurance cover is still a concern for super insurance and super fund members around Australia.

Sources: FOS Annual Review 2016-17FY, – www.superratings.com.au,

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