Housing life and lump sum disability insurance within the superannuation will be much more palatable for clients especially if the family budget is already stretched.
A significant proportion of family income is probably already being absorbed by mortgage repayments, school tuition fees and day to day living expenses. The thought of overlaying non-tax deductible life insurance premiums may not resonate especially if they’ve got the option of placing the cover inside superannuation where premiums can be funded out of existing retirement savings.
But as advisers would attest to, it’s important to open up a discussion and quantify the effect of annual premiums on underlying superannuation balances. In most cases, cash flow permitting, there will always be merit in topping up these super balances with tax effective concessional contributions subject to the prevailing cap.
Seon Sweet, Technical Manager AIA Australia, says that this Super-owned insurance calculator will help advisers bring this all important topic to life during initial client discussions when articulating and educating clients about the impacts of premiums on super balances and retirement objectives accordingly. It could be used to educate clients before the getting to the formal Statement of Advice presentation stage.
Seon says “it will also help advisers present a ‘do nothing’ versus ‘do something’ comparison to quantify the long-term benefits of contributing the extra $2,500 each year into super off the back of the recent increase to the concessional contributions cap”.
Seon says, for some time now contribution caps have been muted. The increase to the contributions cap provides clients with scope to tax effectively build up their super to counter the deduction of annual premiums over time. An extra $2,500 per year could compound into a meaningful boost to retirement saving balances by the time the client gets to retirement. That could be implemented via an effective salary sacrifice agreement or via personal deductible contributions, subject to the usual notice of intent timeframes and parameters.
It’s also important to remember that ASIC Report 413 called out the need to address the key risk of funding insurance premiums from superannuation funds, that is, that it may prevent the client from meeting their retirement objectives. The Report noted that advisers should give adequate consideration to this risk when recommending this strategy, including consideration about making concessional or non-concessional contributions that at least negate the effect of insurance premiums on retirement benefits.