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Many conventional superannuation funds allow members to hold Life, Total and Permanent Disability (TPD) and Income Protection insurances. An alternative to this is ‘risk-only’ or ‘insurance only’ super products offered through retail insurers. But what is that and what does it mean?
These insurance products offer Life, TPD and Income Protection insurance policies which are owned by the superannuation fund trustee without any investment component, so there is no retirement savings balance for the member.
The differences between risk-only funds and conventional super funds are outlined below:
Conventional super funds
The primary purpose is the provision of insurance
The primary purpose is building retirement savings
No running account balance
Running account balance which is invested
Insurance policies are generally underwritten
If available, insurance policies are offered by default without any underwriting (additional cover can be applied for subject to underwriting)
There are numerous advantages to insurance within risk-only super funds.
Premiums within risk-only funds can be funded through contributions or rollovers from another super fund. This means that people can have Life, TPD and Income Protection insurance without needing to pay for premiums from their personal cash flow.
Many risk-only super funds offer the ability to claim the insurance premiums rolled over as a tax deduction within the fund, resulting in a 15% tax rebate and a lower premium paid. This process can be made even easier by setting up an ‘enduring rollover facility, which allows the risk-only super fund to automatically request a rollover of premiums yearly from the member’s designated super fund.
Risk-only funds are particularly suitable for the following types of people as they provide certainty of cover:
The Protecting Your Super (PYS) legislation that came into effect on 1 July 2019 has had a great impact on insurance held through conventional super funds. Under PYS, super accounts with a low balance of $6,000 or less have any insurance cancelled unless the member advises the fund that they wish to retain the insurance.
According to Moneysmart, over 70% of Australians with life insurance hold it through superannuation, so many Australians have had their insurance automatically cancelled.
Risk-only funds have been largely unaffected by PYS given they have no member balance to begin with. This makes it easier for people to change their super funds without worrying about accidentally cancelling any insurances.
Risk-only funds offered by retail insurers generally offer the ability to have a ‘super linked or ‘split’ TPD and/or Income Protection policy. This allows the policyholder to have TPD or Income Protection insurance which has split ownership between the risk-only fund and the policy holder’s personal name. The majority of premiums are paid from the superannuation environment, reducing the out-of-pocket cost to the policyholder.
In addition, having a split TPD and Income Protection policy allows the insurer to offer more additional benefits that aren’t available with insurance held within conventional super funds, such as TPD insurance with an ‘Own Occupation’ definition and ancillary benefits such as the reimbursement of rehabilitation and carer expenses. Risk-only funds offer retail policies which have greater quality than group insurance policies through conventional super funds.
If you have any questions regarding personal insurance, please do not hesitate to contact the Risk & Insurance team at Hewison Private Wealth and discover the difference advised insurance can make.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email firstname.lastname@example.org or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.