Choosing whether to hold life insurance inside or outside superannuation is a key decision in your financial strategy. For many high-income earners, this choice is not just about cost but about long-term financial efficiency. The tax implications, estate planning outcomes, and superannuation rules all come into play. That’s why it’s worth speaking with experienced superannuation consultants who understand the nuances of superannuation planning and can offer tailored taxation advice that suits your personal circumstances.
Let’s break down the key considerations.
Holding Life Insurance Inside Super
Most industry, retail, and self-managed super funds allow members to hold life insurance within the fund. This typically includes term life, total and permanent disability (TPD), and income protection cover.
Pros:
- Tax concessions on premiums: Super funds can claim tax deductions on premiums for death and TPD cover. These are paid from pre-tax contributions (concessional contributions), which are taxed at 15% rather than your marginal tax rate.
- Cash flow efficiency: Premiums are deducted from your super balance, not your after-tax income. This can help free up funds for other expenses or investments.
- Automatic acceptance: Many funds offer cover with no medical underwriting for a base level of cover.
Cons:
- Erosion of retirement savings: Using your super to pay premiums can reduce your long-term retirement balance.
- Restricted access to benefits: TPD and income protection benefits inside super must meet the superannuation release conditions, which can limit how and when you can access the payout.
- Beneficiary limitations: If your death benefit is paid to a non-dependent (for tax purposes), the payout could be taxed up to 32%.
These trade-offs highlight why superannuation planning should be approached with professional taxation advice. The structure may suit some but not all.
Holding Life Insurance Outside Super
Purchasing a standalone policy gives you more flexibility and control over how your insurance is managed and paid out.
Pros:
- Direct access to benefits: There are no super release conditions, so benefits are paid directly to you or your nominated beneficiaries without needing to meet specific criteria.
- More tailored policies: Insurers can offer broader options, including more flexible definitions for TPD and a wider range of policy features.
- Clear tax outcomes for beneficiaries: Death benefits paid to beneficiaries outside super are usually tax-free, especially if the payout goes to dependents.
Cons:
- No tax deduction on premiums for life and TPD insurance: Unlike inside super, you cannot claim a deduction on these premiums in most cases.
- Impact on cash flow: Premiums are paid from your after-tax income, which may reduce disposable income.
While outside-super policies offer greater flexibility, the higher cash flow requirement and lack of tax deductions may deter some. Again, this is where expert superannuation consultants can guide you through personalised wealth structuring options.
Tax Efficiency: What’s the Verdict?
The answer depends on your individual situation. For younger professionals or those with limited cash flow, using a super to fund life insurance may provide upfront tax efficiency. However, this needs to be weighed against the potential long-term impact on retirement savings and the tax paid on death benefits.
For higher-income individuals, especially those with estate planning concerns or complex family structures, holding life insurance outside super can provide more flexibility and clearer outcomes.
It’s also important to consider the type of insurance:
- Term life insurance is generally tax-deductible inside a super and can be tax-free to certain beneficiaries.
- TPD insurance has tighter access restrictions inside super.
- Income protection is typically more tax-effective when held outside super, as premiums can be claimed as personal deductions and benefits are paid directly.
The key is to consider all aspects together — tax efficiency now, retirement impact later, and the needs of your intended beneficiaries.
Talk to Expert Superannuation Consultants Before You Decide
No two people have the same risk profile, income structure, or long-term objectives. Choosing where to structure your life insurance isn’t just a one-time decision. It can change as your career advances, your family grows, or your financial situation evolves.
Professional superannuation consultants can assess your current super fund, retirement projections, and estate intentions. With expert superannuation planning and personalised taxation advice, you’ll be able to structure your cover in a way that works today and supports your financial goals tomorrow.
