Most Australian employees have some form of life insurance, often through their superannuation fund. However, many of us tend to ‘set and forget.’
To make the most of your life insurance policy, it is useful to understand how it works, and how premiums and payments are affected by tax.
Various types of life insurance:
Life insurance is an umbrella term for a range of policies that cover different situations. They include:
– Life Cover, which pays out after your death to someone you have nominated.
– Income Protection covers you if you are unable to work because of illness or injury.
– Total and Permanent Disability (TPD) insurance provides medical and living costs if you become permanently disabled.
– Accidental Death and Injury cover pays a lump sum if you die or are injured.
– Critical Illness or Trauma insurance pays a lump sum to cover medical expenses for major medical conditions.
– Business Expenses insurance covers ongoing fixed business costs if you are a business owner suffering serious illness or injury.
Tax benefits and deductions:
The premiums for most types of life insurance are not tax deductible, but there are exceptions. Premiums for Income Protection held outside of Super are tax-deductible and inside Super, for the self-employed. Business Expenses insurance premiums are also tax deductible.
The tax treatment of benefits paid out by policies also varies according to the type of policy and your situation, so it is important to talk to us. Generally, life cover paid to someone who is financially dependent on you (typically a spouse and children under 18 years) is not taxed. But if the beneficiary is not your financial dependent, they can expect to pay tax.
Income Protection insurance payments must be declared on your tax return and will be taxed at your marginal rate, just like your usual salary. Business Expense insurance payouts are also taxable. However, lump sum payments made through other policies are not taxable.
Inside Super or outside?
Some of these insurances, particularly Life Cover, Income Protection and TPD, can be purchased through your Super fund. Most people have a basic level of cover held this way, but you should check to see whether it is adequate for your needs.
If you are aged under 25 years, have a Super balance of $6,000 or less, or your account is inactive, you will need to “opt in” if you want insurance cover.
Super pros and cons:
You will need to do the sums for your particular set of circumstances, which is where a Financial Adviser can assist. At SAA, our team of professional Financial Planners can review and recommend whether there may be an advantage to using your Super to pay the premiums. The main reason is cost.
Sometimes, the buying power of Super funds allows them to negotiate competitive pricing for insurance products.(i) This is not always the case, so you will need to shop around to make sure you are getting the best deal.
Another potential financial benefit in paying the monthly premiums out of your Super account, is that you are using funds taxed at 15 percent. Whereas, if you pay the premium from your own bank account, you would be using funds already taxed at your marginal tax rate, which may be higher. This way – your pre-tax dollars are working harder and you’ve still got your cash in the bank.
An additional consideration is that premiums can receive a 15 percent up-front tax deduction, if paid annually from Super, via a rollover.
How this works:
Your Life Insurance premium is deducted annually from your current Super fund and paid to a special complying Life Insurance company Super fund, which has been set-up for insurance purposes. This strategy uses what is called an ‘Enduring Super Rollover payment’ and reduces the premium cost because a 15 percent Super tax rebate applies.
The main drawback to paying insurance premiums through Super is that you will be reducing your Super balance, which means less for retirement. However, you could choose to boost your balance using salary sacrifice or personal contributions.
Your safety net checklist:
– Decide on who and what needs to be financially protected, if something should happen to you
– Weigh-up the best type of Life insurance to meet your needs, and shop around
– Be clear about any tax implications of an insurance payout
– Make sure the policy benefit is adequate and check it annually
Deciding on the type of cover you may need can be tricky, so please give us a call to discuss all your insurance needs.
(i) Insurance through Super – Moneysmart.gov.au
Information contained in this document is considered to be true and correct at time of publication. In addition, the information provided is general information only, and does not take into account any individuals’ objectives, financial situation and needs. Before acting on any information contained herein, you should consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.***