If you are taking out Life and Total & Permanent Disability (TPD) insurance, you may want to arrange the cover in a super fund rather than outside super.
What are the benefits ?
By using this strategy, you could:
- Potentially reduce the premium costs, and
- Enable certain beneficiaries to receive the death or tpd benefit as a tax-effective income stream.
How does the strategy work ?
There are a range of situations in which you could use Life and TPD insurance to protect your business and the interest you have in it.
In some of these cases, it may also be worthwhile taking out the insurance in a super fund, rather than outside super.
One of the key reasons for holding the cover in a super fund is that you could benefit from a range of upfront tax concessions generally not available when insuring outside super.
- If you earn less than 10% of your income from eligible employment (eg you’re self employed), you maybe able to claim your super contributions as personal tax deduction – regardless of whether they are used in the fund to purchase investments or insurance.
- If you run your business through a company or trust and you sacrifice some of your salary into super, you could purchase insurance in your fund with pre-tax dollars.(1) These tax concessions can generally make it cheaper to insure through a super fund. This will usually also be the case if the sum insured is increased to make a provision for any lump sum tax that is payable on TPD and death benefits in certain circumstances.
- Another benefit of insuring in super is that you (or certain eligible dependants) have the option to receive the TPD (or death) benefit as an income stream, rather than a lump sum payment. When this is done:
- Because lump sum tax won’t be payable when the income stream is commenced, there is no need to increase the sum insured, and
- The income payments will be concessionally taxed.
For example, an operating structure may consist of a company as trustee for a discretionary trust.
Let’s begin explaining what the structures are, and how the entities fit into these structures. These structures can be used to map your current situation and suggests a plan to improve your asset protection.
An income stream generally wont suit when the purpose of the insurance is to repay business debts or release a loan guarantee or security. This is because, to achieve this objective, the money will need to be received as a lump sum payment.
However, when the insurance is used to equalise your estate, the beneficiary(ies) (2) may prefer to receive the proceeds as a regular and tax-effective income to meet ongoing living expenses.
Note: Any contributions made to a super fund including contributions made to cover the cost of insurance premiums, will count towards the contribution caps. If these caps are exceeded an excess contribution tax will be payable.
- From 1 July 2012, an additional 15% tax will apply to certain concessional contributions of individuals whose income and concessional contributions exceed $300,000. The tax will only apply to those contributions in excess of the $300,000 threshold and will be assessed to the individual. This measure could reduce the attractiveness of insuring inside super.
- Restrictions apply to who can be nominated as a beneficiary and taxation liabilities may apply to certain eligible persons when a death benefit (including insurance proceeds) is paid in the form of a lump sum, pension or a combination of both from a super fund.
MLC Protecting business owners Smart strategies guide”
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