Life insurance and superannuation funds
[social_share]Many people will put their life insurance into superannuation funds as there are tax advantages in doing this. However, there are some limits to the life insurance that can be a problem for life insurance providers.
Superannuation funds can offer life insurance to people who are already members. This has some excellent cost implications which should not be ignored.
The first advantage is that the insurance can be purchased with pre-tax income, as with any other superannuation contributions. So for example if the policy requires a premium of $1,000 but the taxpayer has a 45% tax rate, then he or she will be charged $550, with $450 in effect coming from the tax man. This means the insurance essentially discounts the tax that would otherwise be paid. For policy holders with lower tax rates, this advantage will be less although still present.
Another advantage is the discount often provided by superannuation funds, which purchase policies in bulk and can therefore offer lower rates. Due to the type of policy offerred by many superannuation funds, no medical check may be required. This can save a large amount of money, another advantage.
There are some disadvantages to this type of insurance policy, one of which may be a lack of flexibility. For many people, life insurance should be chosen to fit their circumstances, whereas policies offerred by superannuation funds tend to be one size fits all.
At the time of the payout, there may be some uncertainty regarding receipt of the funds. Superannuation funds do usually pay out to the named beneficiaries, but this is not always the case and directly-purchased policies are more likely to pay out. This can be an issue, particularly if the beneficiary is not related to the policy holder.
There may also be a delay, as the funds must go into the superannuation fund before they are dispersed to the person named as the beneficiary. This is because the superannuation fund itself is listed as the first beneficiary, unlike directly purchased policies, which pay directly to the beneficiary. There can also be administrative delays in paying out the benefits.
