When looking at options for you to possess personal insurances such as term life, critical illness (trauma), total and permanent disablement (TPD) and/or income protection we need to assess whether these insurances are best held inside a superannuation fund or held by you personally.
The factors we consider are:
- The types of insurance required;
- Cashflow ability or constraints;
- Tax treatment & deductibility;
- Ownership structure;
- Estate planning implications.
We have compared the above features below.
Types of Insurance
- Term Life – this insurance provides a lump sum benefit to the policy owner upon the life insured’s death. This lump sum benefit can be used to repay a mortgage or other debts, fund educational costs for children, be invested to provide an income stream for their spouse, children and/or grandchildren.
- Total & Permanent Disablement (TPD) – this insurance provides a lump sum benefit if the person insured suffers an injury or illness that prevents them from working again.
- Critical Illness (Trauma) -this insurance provides a lump sum benefit on diagnosis of a defined specific event. It is designed to help people recover from a crisis or traumatic event such as heart attack, stroke, cancer or other life-threatening condition.
- Income Protection (IP) – this insurance provides the insured person with an income stream if they are unable to work. Income protection policies generally will cover 75% of the insured’s gross income and the benefit is payable to them up to a specified date from claim i.e. 2 years, 5 years or to age 65.
You can hold all of these insurances personally, however due to the access restrictions within superannuation and the need to meet a condition of release, such as retirement, it would generally not be advantageous to hold a trauma policy.
Cashflow
One of the biggest drivers for personal insurance decisions is the ability to pay the premiums. The premium you are required to pay for your insurance policy depends upon your age, medical history and lifestyle factors. You can opt for a cheap policy; however this may not be suitable for your needs.
This is where holding your insurance via superannuation may be your best option. Instead of having your premiums paid from your personal income, the premiums are deducted from your superannuation savings.
You would need to consider the impact of what drawing down on your superannuation balance will have for your retirement, however we can ensure that you have a sound strategy in place to meet your needs now and into the future.
Tax Treatment & Deductibility
You should be aware of the tax treatment of insurance proceeds upon claim. We have illustrated the tax treatment below:
| Insurance | Within Super | Outside Super | Notes |
|---|---|---|---|
| Term Life | Nil tax for the Fund* | Nil tax | * Taxable if received by non-dependant |
| TPD – Any Occupation | Nil tax | Maybe tax^ | ^Taxable if received by non-dependant |
| TPD – Own Occupation | Nil tax | Maybe tax^ | ^Taxable if received by non-dependant |
| Trauma | N/A | Nil tax | |
| Income Protection | Nil tax for the Fund* | Taxed at marginal tax rate | *Taxed at marginal tax rate for individual |
Premiums are not always tax deductible. A summary of which premiums are tax deductible is below:
| Insurance | Within Super | Outside Super |
|---|---|---|
| Term Life | Yes | No |
| TPD – Any Occupation | Yes | No |
| TPD – Own Occupation | No | No |
| Trauma | N/A | No |
| Income Protection | Yes | Yes |
As illustrated above, most personal insurance premiums are deductible to the Fund when held via superannuation. This is great when you have a self-managed superannuation fund as you indirectly are able to take advantage of the deduction.
Ownership Structure
Care needs to be taken here and you need to ensure that whomever you wish to receive the insurance proceeds is in fact the recipient if the time comes to claim.
The parties to an insurance policy are generally:
- Life Insured – this is the person that the insurance is based on. If this person dies, suffers an illness or injury, or another defined event, a claim can be made to release the sum insured.
- Policy Owner – this is the person that has control over the policy and pays the premiums. This can be the life insured or another person. If no beneficiary is nominated, the policy owner is the recipient of the insurance proceeds upon claim.
- Beneficiary – this is the person or persons nominated to receive the insurance proceeds upon claim. This can be the policy owner, life insured or another person.
If an insurance policy is held via superannuation, the superannuation fund is the policy owner by default. If there is no binding death beneficiary nomination, the insurance proceeds upon receipt to the fund are paid out at the Fund’s trustees discretion. This may not be an ideal outcome for you and you should ensure you have the appropriate documentation in order.
Similarly, if the insurance policy is held outside of superannuation, you should ensure that the policy owner and beneficiaries are appropriate.
Estate Planning
When establishing an insurance policy, you should consider the estate planning implications to ensure tax effectiveness and that the monies are received by the intended recipient.
The taxation implications for each of the personal insurance have been detailed above.
More importantly, you should ensure that your nominated beneficiaries are in order, are appropriate going forward and that you have up to date and correct estate planning documentation, such as a Will.