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FINANCE: Inside or outside super?

Most people can choose to own life insurance themselves or to hold this insurance in their superannuation fund.

But it’s not a simple decision – the way these policies operate and are taxed can vary depending on whether they are held inside or outside super.

A key benefit of having life insurance within your super fund is that the premiums are deducted from your super account, rather than your personal account.

The disadvantage is that it can reduce the amount of money you have available in retirement.

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In some circumstances, the super fund can claim a tax deduction for the cost of the premiums. So it’s tax efficient because the premiums are effectively paid with pre-tax money. 

However, it’s important to realise that not every superannuation fund offers every type of life insurance cover.

Few super funds offer trauma cover because they cannot claim a tax deduction for these premiums. 

It might not be possible to get the amount of cover that you need, and the terms are sometimes less comprehensive than a policy owned directly. 

Another disadvantage is that it is not always possible to immediately withdraw the money from your super fund.

This is because superannuation is designed as a retirement savings vehicle subject to a strict set of rules controlling access.

As a result, a beneficiary must satisfy a condition of release as defined in the legislation before receiving any lump sum payment from a Total and Permanent Disability policy held within a super fund.

Anyone can own or be a beneficiary of a life-insurance policy owned directly, but the options are narrower for policies held in super because the person must be considered a beneficiary under the super and might end up paying tax on the payout.

Another option is to take out cover both through super and directly, and in fact, this combination might sometimes offer the best solution. 

To find out what would work best in your circumstances, talk to a licensed financial adviser.

The entire September 11, 2019 edition of The Weekly Advertiser is available online. READ IT HERE!