If you are taking out Life and Total and 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.
Phillip aged 50 owns a tiling business valued at $500,000. The business is run through a company from which Phillip draws a salary, and pays tax at a marginal rate of 39% 3. Phillip wants to leave his business to his son Scott, who works in the business. As part of a strategy to treat his other son, Richard equally, Phillip’s financial adviser recommends he:
- seeks his solicitor’s advice on adjusting his Will, and
- fund the arrangement by taking out $500,000 of Life insurance, where the premium will be $1,128 4 in the first year.
His adviser also explains that it will be more cost-effective if Phillip takes out the insurance in super. This is because if he arranges for the company to sacrifice $1,128 of his salary into super, he will be able to pay the premiums with pre‑tax dollars 5.
Conversely, if he purchases the insurance outside super and pays the premiums himself from his after-tax salary, the pre-tax cost would be $1,850 after taking into account his marginal tax rate (ie $1,850 less tax at 39% [$721] equals $1,128).
By insuring in super, Phillip could make a pre-tax saving of $721 on the first year’s premiums and an after-tax saving of $440, after taking into account his marginal rate of 39% 3.
3 Includes a Medicare levy of 2%.
4 These premiums are based on MLC Limited’s standard premium rates as at 28 April 2015 for non-smoking males aged 50, with $500,000 in Life cover that increases by 5% each year and includes a policy fee. In reality, they may pay different premiums based on factors such as their age, health and the amount of insurance each of them requires to protect their respective business interests. This is for illustrative purposes only and you should refer to the relevant disclosure document before making an insurance decision.5 Because super funds generally receive a tax deduction for death and disability
5 Because super funds generally receive a tax deduction for death and disability premiums, no tax is deducted from the salary sacrifice super contributions (see FAQs). 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. Contributions that are salary sacrificed must be formally agreed with your employer in an effective salary sacrifice agreement.
Let’s now assume he continues this cover for 15 years and the amount of insurance increased by 5% pa, to ensure the benefit payable keeps pace with inflation. Over this period, the after‑tax savings could amount to $22,843 (in today’s dollars). So insuring in super could be significantly cheaper over a long time period.
Note: This case study highlights the importance of speaking to a financial adviser about the benefits of taking out insurance in a super fund. A financial adviser can also address a range of potential issues and identify other suitable protection strategies
Tips and Traps
- Insurance cover purchased through a super fund is owned by the fund trustee, who is responsible for paying benefits subject to relevant legislation and the fund rules (see ‘Restrictions on non‑death benefits’ in the Glossary). When insuring in super, you should be clear on the powers and obligations of the relevant trustee when paying benefits.
- When making salary sacrifice or personal deductible contributions to fund insurance premiums in a super fund, you should take into account the concessional contribution cap (see Glossary).
- When insuring in super, you can usually arrange to have the premiums deducted from your account balance without making
additional contributions to cover the cost. This can enable you to get the cover you need without reducing your cashflow.
- While Critical Illness insurance is generally not available within super, it is possible to purchase Income Protection (or Salary Continuance) insurance in super with a choice of benefit payment periods up to age 65. To find out more about the tax implications, see FAQs.
- It may be even more cost-effective over the longer term if you pay level premiums, rather than stepped premiums that increase each year with age (see Strategy 6).
- From 1 July 2014, own-occupation TPD and Critical Illness insurance benefits cannot be provided through super (both retail and SMSF funds). Superannuation funds can only provide insurance benefits that are consistent with the conditions of release. The continued provision of benefits to members who joined the fund before 1 July 2014 are the exception.
“MLC Protecting business owners Smart strategies guide”