Financial planners should be wary of the pitfalls of placing clients’ life insurance policies inside superannuation, a risk chief has warned.
There are definite advantages of making insurance affordable by placing it inside super, Asteron head of technical services Louise Biti said.
“The flip side is disadvantages, or rather complications, of adding the layer of superannuation into the arrangement that will all materialise at the time a claim needs to be paid.”
Life insurance claim payments are made to the trustee of the superannuation fund. To get access to the money the claimant or their beneficiary needs to get a condition of release.
Death is an automatic condition of release, although access to the insurance pay-out may be delayed because of the extra layer of administration.
However, a total and permanent disability claim can be problematic as definitions are more restrictive under the Superannuation Industry (Supervision) Act.
In addition, cover held inside superannuation death claim payouts may be subject to taxation, Biti warned.
A client’s death claim can be taxed up to 31.5 per cent, unless they have dependent children.
“It may look easier and cheaper to have insurance inside super, but you may not be buying the same policy,” Biti said.
The Asteron Lifeguard death policy inside super has less features because of the way super is structured.
Biti suggested advisers draw up a checklist of the advantages of insurance in super and “weigh it all up”.
