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Smart Investing
Insurance in line for super makeover
25 May 2007
Robin Bowerman
The integration of superannuation into our everyday money matters is gathering pace.
This week we saw ING/ANZ announce plans for a pension account with access via the banking network. Last month we had a new tax ruling that will make insurance even more attractive to buy under your super fund’s umbrella.
This July marks the start of a new order within superannuation. For most people over 60 withdrawals from their super fund will be tax-free. The full impact of that change will possibly not be fully understood for several years but it promises to fundamentally change the role of superannuation in the way an average investor manages their money.
The super fund will be the centrepiece of most people’s financial plan and its role is likely to broaden out significantly. The change by the tax office so that premiums on income protection insurance are tax deductible for cover lasting more than two years is a great case in point.
Up until now if you bought income protection or continuance through your super fund you really needed to also buy a extra cover outside the super fund that had a two-year wait period. That allowed you to take advantage of the super fund’s policy but covered you in the unfortunate event that your injury illness meant you were out of work for more than two years.
Why would you buy insurance through a super fund rather than as an individual? Large super funds can typically access group discounts and therefore deliver lower premiums on normal life insurance to what you could buy separately. The super fund also gets a tax deduction on the premiums which an individual cannot.
The other benefit of the group buy is that often a minimum level of cover is available with automatic acceptance so you do not have to jump through the medical hurdles that individual policies will almost certainly involve. Self-managed super funds probably cannot get the benefit of group discounts but provided the trust deed allows it an SMSF can buy life and income protection insurance.
When you look at income protection insurance the tax deduction is available to you as an individual as well as the super fund so the savings will not be as great. However, having the fund pay the insurance premiums can help from a cashflow point of view because you do not have to find the cash for the premiums.
Australians are chronically underinsured so this change to the tax position and the growing awareness of how super funds can be used as the foundation stone of retirement living can only be positive.
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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