Ask an Expert – Member balances funding insurance in super

National Technical Manager

David Glen

Question

My question relates to the situation where a superannuation balance is used to fund an insurance in superannuation arrangement. How does the adviser alert the client to the impact of erosion of retirement savings under this arrangement? My understanding is that there is no set answer to this question, and I am not aware of or any case law on this point. It’s a balance between the importance of the cover and preserving their retirement savings.

Do you have a view on what percentage a premium can be of the client’s employer or personal super contributions before the insurance in superannuation arrangement becomes inappropriate? And does their super balance also come into the overall consideration?

Answer

We are not aware of any guidelines for the percentage split between contributions into superannuation funding retirement savings and those funding the cost of the insurance arrangement.

We would argue that this percentage split is not the key determinant. The key determinant is the amount required to fund the client’s lifestyle in retirement and the impact of the proposed insurance arrangement on this strategy.

We would suggest the following approach to address this issue:

1. Establish the client’s life insurance requirements. Insurance inside versus outside superannuation is not relevant at this point.
2. Determine the insurance premiums required to fund these arrangements.
3. Estimate the likely duration of the life insurance contract. For example, an income protection contract for a client aged 40 could have a duration of 25 years, assuming that the client will remain in the work force to age 65.
4. Estimate the premiums payable over the life of the insurance contract.
5. Where the trustee provides a rebate of premiums reflecting its tax deduction in the super fund, reduce the total premiums payable for any rebates such as the 15% tax rebate.
6. Estimate the loss of earnings in the superannuation fund caused by the funding arrangement using an estimated earnings rate for the superannuation fund.
7. The estimated erosion would be the sum of the amounts calculated in 5 and 6 above.
8. Adjust for any strategies to mitigate erosion. For example, the client’s cash flow may improve in the medium-term and the erosion can be eliminated by additional contributions into superannuation.

TAL has an erosion calculator which estimates the erosion created by using the member balance to pay insurance premiums including the impact of reduced earnings caused by insurance in superannuation.

This calculator is available on request from the TAL Technical Team at AskAnExpert@tal.com.au.

Please do not hesitate to contact us if you need to discuss any of the above points.

Our answer is subject to the disclaimer below.

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Disclaimer

The information contained in this email is general information only and is not intended to be legal, taxation or financial advice. TAL Dai-ichi Life Australia Pty Limited, its subsidiaries, and its representatives have not taken into consideration any individual’s personal circumstances, financial needs, or objectives. If any persons are intending to act on the information contained in this email, consideration should be given to the appropriateness of this general information in the light of that person’s own objectives, financial situation, or needs before acting on the information. Persons acting on any matter covered in this email should seek independent professional advice on the application of that matter to their individual circumstances. In relation to any financial product referred to in this email, a copy of the Product Disclosure Statement should be obtained and read prior to making any decision regarding the acquisition that financial product.