What to consider for funding premiums via superannuation

Geoff Kellett, Head of Sales

 

For many of your clients, particularly those who are younger, in the high-mortgage belt or have dependent children, deducting insurance premiums from their super accounts offers significant benefits at a time when cashflow is vital.

Generally, there are two ways to fund these insurance premiums. The traditional approach has insurance cover held by the member's super fund owned by the fund's trustee, with premiums paid from contributions. 

More recently we have seen the emergence of a second approach where stand-alone life cover (held as super) is taken out independently of the member's super fund. Where contributions are not made to the super-owned insurance-only policy (which is typically the case) premiums are funded by annual partial rollovers from the member's usual super fund.

This standalone approach to funding premiums increases the complexity of the process, with an additional step (and trustee) needed for acquiring, managing and claiming on the policy - often running counter to the client's desire for a simpler financial plan. 

Furthermore, funding premiums through periodic superannuation rollovers is a transaction which often incurs an extra cost to the funds administration and therefore is, arguably, not best practice, and in some cases could run contrary to your client's best interest.

Taking insurance cover on the client's super fund platform with premiums funded directly virtually guarantees that insurance will be paid. Some of the problems when rolling from other super funds to pay for stand-alone policy premiums can include:

  • insufficient balances
  • the rollover is refused as it will exceed the number of roll overs allowed by the fund in the same year 
  • the fund requests more information, or
  • an incorrect Australian Tax Office (ATO) code causes the rollover request to reject.

It's also worth noting that a super fund can legally refuse to process the rollover if the fund balance is below $5,000.

In the past, we may have forsaken these cashflow efficiencies and borne these administrative risks as an acceptable trade-off for obtaining a superior life policy to that offered in their primary fund. However, as technology and products have evolved, platform providers are now addressing what has traditionally been one of the greatest inhibitors for advisers writing risk through platforms. That is the lack of choice and the disconnect between the most suitable insurer for each client's unique requirements and the one-size-fits-all insurance option under their preferred platform.

To help planners satisfy their best interests duty and their clients' desire for choice, IOOF has expanded its insurance providers to include AIA and Zurich, in addition to its established TAL retail and group insurance options. 

For planners writing risk, platforms help consolidate client's accounts, streamlining compliance requirements, improving administrative efficiencies and ultimately allowing you to focus on delivering better client value add activities. A single platform lets you view individual client reporting, including their insurance premiums, under one 'screen' or statement, with one tax report to run.

Reducing the number of steps and increasing the ease and speed of getting insurance for clients who are used to getting services and products on-demand, is another benefit that will ultimately make it more likely that insurance cover will be taken up. 

Writing risk through platforms is also advantageous in those situations when advisers and clients drift away and lose contact with their adviser. 

IOOF Insurance Specialist, Peter Stathis says that despite life company assurances that the process to make the partial rollover is automated, a super-owned insurance-only policy funded via annual partial super rollovers is at greater risk of lapse where, for example, the member changes jobs and starts contributing to a new super fund. 

"If the member has forgotten the reason the super-owned insurance-only policy was taken they may mistake anniversary notices as a demand for payment , ultimately ignoring them and allowing the policy to lapse, or worse still asking the insurer directly to cancel the cover – with potentially devastating financial results " he adds.

From a client's perspective, writing insurance through platforms is often more convenient, more practical – and less confusing. Their super fund statement will clearly set out insurance premiums as a line-item expense usually with the description 'Insurance premium'. The annual partial rollover method might be seen as vague, which when deducted yearly by a third party may lead–to potentially time-consuming phone calls from members seeking an explanation of the "Partial Withdrawal" line-item.

These reasons correlate with recent Investment Trends survey data pointing to financial advisers increasingly choosing to write insurance through platforms, with 38% of risk now written this way in 2014 (up from 29% the year before) and a similar percentage expected in 20151

As IOOF continues to offer insurance alternatives under the umbrella of their platforms, the simplification of having insurance, super and investments in one place is just one of many advantages to writing insurance through a platform.


1. Investment Trends Report - June 2014

Important
The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.