Life insurance through Super reduces your retirement benefits
Most Australians have life insurance through their Super.
It’s generally an automatic inclusion and it’s convenient: as long as your Super balance is sufficient and you’re account isn’t dormant, the premiums are paid to the life insurer and you’re covered.
For most of us, our Super will be a primary source of retirement savings: money we have set aside over our working lives for when we retire.
And by paying life insurance premiums through Super, the balance of these retirement savings is reduced.
Moreover, due to the compound nature of Super, the hit to retirement savings is multiplied.
How does compounding in Super work?
The genius of Super is that it compounds and every dollar counts, especially earlier on.
Here is how it works:
- Initial investment: when you start depositing money into Super, your money is invested in things like stocks, property and other assets.
- Earnings: these investments generate returns such as interest or dividends. If your Super fund generates an annual 8% return, your investments have grown 8% over that year.
- Reinvestment: these returns are then reinvested together with your initial investment and the next year, your return is on the cumulative investment of your initial investment and your previous returns: the returns keep compounding, year are year.
- Growth over time: as this process continues, your investment grows exponentially: and the earlier you start and the longer you invest, the greater the compounding effect.
A good analogy is to think of it like a snowball rolling down a hill. The snowball starts small though as it rolls down the hill, it grows and grows as it picks up more snow (returns).
Genius right! (We even rendered a snowball in our style!)
The impact to retirement savings can be significant: a reduction in balances of up to 25%
In 2018, the Productivity Commission undertook a major review into Superannuation and its efficiency and competitiveness.
As part of this, the Productivity Commission released a Supplementary Paper that modelled the fiscal impacts of insurance in Superannuation across a number of cohorts.
Whilst their modelling determined that “default insurance in superannuation offers good value for many”, they found that balance erosion could be excessive and highly regressive, having a disproportionate impact on people on low incomes, those with intermittent labour force participation and those with multiple Super accounts.
For these cohorts, the reduction in retirement balances could reach 14% ($85,000) and for some disadvantaged members, balances could be reduced by as much as 25% ($125,000).
Reducing the impact on your retirement savings
Our advice is general in nature, though here are two things you could do.
- Offset the life insurance premium deductions with contributions to your Super: through personal contributions or salary sacrifice, you could make deposits into your Super to offset the premium deductions.
- Open a retail policy outside of Super: rather than paying for your policy through Super, open a direct, retail policy outside of Super. You will need to pay for this out of pocket after-tax, though there are tax deductions for income protection insurance.
Conclusion
For many, the convenience and surety of life insurance through Superannuation outweighs some of the limitations.
Given that Superannuation's primary purpose is to provide you with sufficient retirement savings, consider the impact your life insurance premiums through Superannuation might have on your savings down the track.
