Buyer beware: the new risk to clients funding insurance in super

Of course like any Budget, there are “winners and losers” and while the retrospectivity may be causing some concern to advisers, one thing you shouldn’t ignore is the significant opportunity that the super changes provide to get in touch with clients, let them know about the new measures, and give them the opportunity to review their strategies and make sure they understand their options and the implications.

One of the most significant implications of the Government’s changes for clients – especially those funding their life insurance premiums through super – could be the reduction in the Concessional Contribution Cap to $25,000 and Lifetime Non-Concessional Cap to $500,000, which come in to effect on 1 July 2017 and 23 May 2016, respectively.

This means, should the changes be passed, that advisers will now have to carefully consider the impact on their clients’ final account balance from holding insurance inside super and if the value is still there.

What is the potential impact?

Recent findings from research house DEXX&R reveal that for some individuals, premiums for life insurance held through super could represent more than a third of their Concessional Contribution Cap*.

The modelling is based on ten life insurance offerings through retail and industry funds on a member aged 50 next birthday, with $2 million Death and TPD and $12,000 per month Income Protection, and estimates in this scenario, that insurance premiums would represent an average of 42% of the cap. 

It is important to note that these calculations were based on white-collar professionals, and premiums for members in higher-risk occupations could be higher.

Why you should consider reviewing your clients’ super strategies

Over the past five years the percentage of in-force individual lump sum risk premiums held inside super has increased to 32% of total premium, and income protection in-force premiums held inside super has more than doubled to 15%#.

While this strategy may have been attractive in the past due to cash-flow reasons, the Government’s reduction in contribution caps means it is an approach which could see more Australians unwittingly eating in to their retirement balances.

Another issue for advisers to consider is that many younger clients may not even want to move their insurance outside superannuation until they reach pre-retirement age and their children have grown. Before this time it’s common for people to be uninterested in retirement outcomes, with their main focus usually on paying down debt and maximising cash-flow for family living expenses. For these clients, insurance is all about mitigating life’s risks without affecting their hip pocket. 

Furthermore, the longer clients keep the funding of insurance within superannuation, the longer they miss out on the benefit of compounding interest and let their retirement dreams slip away.

The curious case of IP

As with everything, the decision to hold insurance inside or outside super depends on the individual circumstances of each client and what works best for them. While there are advantages in having Income Protection funded through superannuation – most obviously it being easier on the hip-pocket – there are certain features that are not offered (such as an agreed value policy, or home support option) in superannuation. 

In addition, there is the possibility that certain benefits may not meet a condition of release and will be unable to be released from the client’s Fund. These added layers of complexity – particularly at the time of claim – can often outweigh the cash-flow savings from holding IP in super and as such, advisers should consider whether placing clients’ IP outside of superannuation is a more rational option. And remember if you do, the premiums are fully tax-deductible.

http://www.riskadviser.com.au/viewpoint/13138-income-protection-inside-super

For more information please contact:

Anthony Bourke
Director
Moore Stephens Insurance Services (VIC) Pty Ltd
+61 3 9608 0145                        
abourke@moorestephens.com.au



* ‘Life Insurance May Impact Super Cap Changes’, riskinfo, 12 May 2016
# Goh, J, ‘Life insurance in super could be detrimental to balance’, Super Review, 12 May 2016.