Insurance in super ‘under threat’
The budget proposal to reduce the concessional contribution cap to $25,000 will lead to “impending issues” for superannuants with insurance policies.
The DEXX&R Market Projections Report for May 2016 indicates that the proposed measure of reducing the concessional contribution cap from 1 July 2017 will see a 50-year-old member with death, TPD and $12,000 per month income protection, allocating 42 per cent of their cap to insurance premiums.
By age 55 this percentage would rise to 71 per cent of their $25,000 concessional contribution cap.
The report stated these calculations were based on white-collar professionals.
“Protection by a member in a higher-risk occupation would be considerably higher,” said the report.
“The proposed caps on concessional contributions and the lifetime non-concessional contributions mean that members will now have to consider the value of holding insurance benefits inside super when the impact on their final account balance is taken into account,” the report said.
Another issue stemming from this, according to Verante Financial Planning director Liam Shorte, is the fact is that younger superannuants may not consider moving their insurance outside the superannuation environment until they reach 45 or 50 years of age.
“Before 45, [people] are not focused on retirement outcomes. Their focus is on paying down debt, family living expenses and using insurance to manage risk without affecting their take home salary,” said Mr Shorte.
“As a result, this will mean many people won't look to move insurance until their late 40s or early 50s when they may find that due to health or lifestyle factors they are unable to move the cover.”
Mr Shorte said it is difficult to get an insurer to transfer terms of a policy if it has not been fully underwritten in the past five years, and many will be coming from underwritten policies.
“This represents a huge problem where they will want to save more towards retirement, but have to keep the cover in super as it cannot be replaced on a like-for-like basis,” he said.
“So they will have to either reduce levels of cover to reduce premiums or take on a policy with loadings or exclusions outside super.”
Henderson Maxwell Private Wealth Management general manager Tony Davison said moving insurance policies out of super is a slow process as it requires time and effort for new policies to be written.
“I do think it’s extremely valid to say that people are going to shift their insurance out of super once they realise what it’s going to be doing [in the long term] to their eventual superannuation balances,” he said.
“The reduction in the contribution caps [means] any strategy in super relying on external cash flow or wages to fund it is under threat.”
Mr Davison said the announcement of this latest measure drives the fact that practitioners should be encouraging their clients to consider the merits of insurance being outside super instead.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.