Consumers holding life insurance in superannuation may fall foul of the proposed concessional contribution cap announced in this year’s federal budget, according to Dexx&r.

Reducing the cap to $25,000 a year could see insurance premiums take up a significant part of the contributions, the researcher says.

Dexx&r cites a case study involving a white-collar super fund member aged 50, with $2 million of death and total and permanent disability (TPD) cover, and $12,000 per month of income protection cover.

It says they may pay 42% of their total cap in insurance premiums.

By age 55 the member could be allocating 71% of the $25,000 cap to insurance premiums.

People in higher-risk occupations would pay even more.

Even people with lower levels of cover in super could see a significant proportion of their cap eaten up by premiums.

Dexx&r MD Mark Kachor says there are issues for members holding a lot of life cover in their funds.

“During the past five years there has been a significant increase in new business for death, TPD and income protection benefits held inside super,” he said.

“The proposed caps mean 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.”

Mr Kachor says advisers must consider the impact on a member’s accumulation balance when deciding whether high levels of insurance should be held inside super. “In particular, the impact on retirement income for members with balances that are well below the $1.6 million that can be transferred on retirement to a complying income stream,” he said.

The researcher has also examined the impact of life insurance on members’ balances.

A member aged 35 with a super balance of $100,000 and contributing the maximum amount allowed would have a final balance at 65 of $2.09 million if they have no insurance.

But if this member had $2 million of death and TPD cover aged 55, with $12,000 per month income protection, their balance aged 65 would be $1.53 million due to premium erosion.

“The proposed lower contribution and lifetime cap on contributions is expected to increase member focus on maximising their concession taxed end benefit,” Mr Kachor said.

“The need for an adequate amount of cover will remain and the sums insured used in the above examples are conservative when applied to the cover required for a typical middle to high-income person with a mortgage and family resident in Sydney or Melbourne.”

Dexx&r has now factored in a lower percentage of individual new premiums in super returning to levels of five years ago.

Advisers will need sound reasons for encouraging fund members to redirect their contributions towards insurance premiums.

“For group life business we anticipate the lower cap will have minimal impact because premium inflows are largely based on default cover,” Mr Kachor said. “Only a small proportion of total premium is generated by higher levels of voluntary cover.”