Insurance in super could be detrimental to balance

Superannuation fund members could cop a significant reduction in their final balance if they hold insurance benefits inside their super, thanks to the proposed reduction in the concessional contribution cap, according to DEXX&R.

The firm's analysis found the proposed caps on concessional contributions ($25,000) and the lifetime non-concessional contributions ($500,000) mean that members will now have to consider the value of holding insurance benefits inside super when the impact on their final balance is taken into account.

DEXX&R said this value consideration was especially for members with balances that are well below the $1.6 million that can be transferred on retirement to a complying income stream.

For example, if a member aged 35 with an account balance of $100,000 and contributed the proposed maximum concessional amount of $25,000 for a further 30 years with earnings of five per cent over that period would have a projected balance of $2.09 million at age 65.

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"If this member had $2 million death and total and permanent disability (TPD) to age 55 next birthday, and reduced this over to $1 million death and TPD from age 55 next birthday through to age 65 plus a $12,000 per month income protection benefit inside super, their projected account balance at age 65 would be $1.53 million based on the same assumptions," the analysis said.

This would be a reduction of $562,535 in balance at age 65 if insurance premiums were deducted inside super.

"The need for adequate cover will not change, sales will continue to grow, however the proportion of new premium written inside super will fall once the lower concessional contribution caps come into place," the analysis said.

DEXX&R noted that over the past five years the percentage of in-forced individual lump sum risk premiums held inside super had increased to 32 per cent of total premium. Income protection in-force premium held inside super had more than doubled to 15 per cent at December 2015.