06 Nov Sometimes a Super Way to Insure
95% of us with dependent children do not have adequate life insurance according to a Financial Service Council report.
If that’s not worrying enough, another Financial Service Council report highlights our vulnerability.
It showed more than 235,000 working age Australians with children suffered a serious injury or illness in 2008.
Unfortunately, people are underinsured because they see personal insurance too expensive to fund with the rising cost of living.
Luckily, insuring through superannuation, or in many cases increasing coverage within super, can be a viable solution.
Insurance can be funded by the accumulated superannuation balance rather than disposable income, or alternatively by using pre-tax income with salary sacrificed contributions.
And the cost benefit of insuring within super can be shown with a quick calculation.
If taking out a life insurance policy with a yearly premium of $1000 at a marginal tax rate of 32.5% plus Medicare levy, the real cost would be $1515 because it’s paid with after tax income.
Taking out the same policy within super would still only have a real cost of $1000 – assuming 15% contributions tax is offset by the tax deduction for insurance in the super fund.
There are issues though, as holding insurance through super can add complexity and this strategy would benefit from getting professional advice.
Insurance inside superannuation means the insurance policy is owned by the super fund trustee and insurance proceeds must meet a condition of release.
Usually there’s no issue with life insurance as ‘death’ is a condition of release, but there’s no Total and Permanent Disability (TPD) condition of release, so this is left to the super fund trustee’s discretion.
Life insurance proceeds also may be subject to tax if paid to a non-tax dependant, in contrast outside super the proceeds would be tax free.
Similarly, TPD proceeds may incur lump sum tax if paid to someone under 60.
In both instances increasing the insured amount would offset the amount of tax to be paid.