Life Insurance
By: Surety Life On: November 02, 2016 In: Insurance Comments: 0

For most business owners, paying for life insurance via super can be a tax effective way for paying insurance premiums. This is despite the fact that it can be cost effective.

The tax deduction can be 30% for companies and could be higher for some self-employed individuals. Paying life insurance premiums from your superannuation account or employer concessional contributions can also assist business owners ease tight cash flows.

Whilst there are tax deductions, there are also some complexities to be aware of. The insurance for Death and Total & Permanent Disability (TPD) benefits could attract unwanted tax. Terminal Illness and TPD will also need to meet a superannuation legislated condition of release before the insurance proceeds can be paid to a beneficiary.

Policies held in super prior to 1 July 2014 have grandfathering provisions which are more generous than what is covered in this article.

Everyone’s situation will be different. You should receive personal specialist insurance and tax advice in reviewing your insurance arrangements.

Main types of insurance

The main types of life insurance in super are Life Cover, TPD and income protection. TPD means you are unlikely to work again in any occupation for which you have reasonable education, experience and training.

There is also an “Own Occupation” definition available for TPD. This, however, can no longer be acquired via super due to the change in legislation form 01 July 2014. There are also restrictions on what type of income protection you can have via super.

Access to an insurance payout in the event of a TPD claim will most likely be difficult. How severe does your illness or injury need to be before you can access your insurance benefit? If it’s via super, you would need to be disabled to an extent where you can’t work in any job that you have reasonable training or experience in.

Due to the harsher superannuation release conditions, the trustee of the super fund would have to be reasonably satisfied that after available rehabilitation you won’t ever be able to work again. TPD insurance arrangements outside super are much more generous and don’t have the same tax implications.

TPD paid via super could be subject to tax from 20% to 30%. This is dependent on the proportion of the taxed and untaxed element. The tax is higher for benefits above $1,395,000 where it is taxed at 47.5%.

Death benefits also could attract tax via super if the nominated beneficiary is a tax non-dependent (e.g. adult non financial dependant child). The taxed could be between 15% and 30%, depending on the proportion between taxed and untaxed elements.

If the super trustee does not have an up-to-date death benefit nomination form, there is the risk of unintended persons receiving a share of the death benefit. Estate Planning Lawyers usually ask for the death benefit to be paid to the estate and have the will take care of this. Owning the insurance personally could be a better solution with none of the tax consequences.

The above information in not intended as advice, if you require advice please contact Surety Life.