When you take out personal insurances through a super fund, you can receive tax concessions or have premiums deducted from your existing account balance.
Research shows that Australians are extremely underinsured.
A staggering 20% of Australian families will be affected by the death of a working age parent, or a serious accident or illness that leaves a household member unable to work#
Benefit from up-front tax concessions
If you buy personal insurances such as Life and/or Total and Permanent Disability (TPD) through your super fund, you may be able to take advantage of a range of ‘upfront’ tax concessions generally not available when insuring outside super.
These concessions can make it cheaper^ to insure through a super fund, or help you get a level of cover that may not, otherwise, have been affordable.
Jack, aged 45, is married to Claire, aged 41. Claire is taking a break from the workforce while she looks after their young children. Jack works full-time, earns a salary of $100,000 pa and they have a mortgage.
After assessing their goals and financial situation, their adviser recommends Jack take out $700,000 in Life & TPD insurance so Claire can pay off their debts and maintain the family’s financial position should he die or become totally or permanently disabled. The premium for this insurance is $1,393 (in year one) outside super.
Their adviser also explains it will be more cost-effective if he takes out the insurance through his super account. This is because if he arranges with his employer to salary sacrifice the insurance premium into his super account, he’ll be able to pay the premiums with pre-tax dollars ^^.
On the other hand, if he purchases the cover outside super:
• he’ll need to pay the full premium of $1,393** (including the policy fee) from his after-tax salary, and
• he will also pay income tax of $890 (after taking into account his marginal rate of 39%***, on the part of his income required to fund the insurance premium.
By insuring in super he could make a total effective saving of $966 on his first year’s premium (including tax and policy fee savings).
Note: This case study is for illustrative purposes only and has been prepared to highlight the importance of speaking to a financial adviser about the benefits of insuring in a super fund. It’s important that you don’t erode your super balance as a result of having premiums deducted from super. This can be prevented by ensuring sufficient contributions are made to cover premium deductions.
A financial adviser can also identify a range of other opportunities to make your insurance more cost-effective over the longer term.
Another benefit of insuring through your super account is you can have the premiums deducted from your super balance, without making additional contributions to cover the cost.
This can help you afford insurance if you don’t have sufficient cash flow to pay for it outside super. It may also free-up cash flow to help you take out other important insurances such as Critical Illness, which can generally only be purchased outside super.
Critical illness insurance can provide you with a lump sum payment to pay medical, rehabilitation and other expenses if you suffer one of a number of specified critical illnesses such as cancer, heart attack or stroke.
Contact us here for further information.
# The NATSEM/Lifewise Underinsurance Report, National Centre for Social and Economic Modelling, Feb 2010.
* Includes assessable income, reportable fringe benefits and reportable employer super contributions. Other conditions apply.
^This will usually also be the case if the sum insured is increased to make a provision for any lump sum tax that may be payable on TPD and death benefits in certain circumstances.
**This premium is for a 45-year old non-smoking male, is based on MLC’s Life cover Super standard premium rates as at February 2015 and includes the policy fee.
^^ Because super funds generally receive a tax deduction for death and most disability premiums, no tax on contribution is generally deducted from salary sacrifice super contributions.
*** Applies in the 2014/2015 financial year and includes a Medicare levy of 2%. Calculation of pre-tax income required to fund insurance premium:
- A. Pre-tax part of income for funding premium = $2,283
- B. Tax on A. is A. x marginal tax rate 2,283 x 39% = $890
- C. Post tax part of income for funding premium A.-B.= $2283 - $890 = $1,393
Disclaimer - This document contains general information only. TTLB Investments Pty Ltd trading as wetalkmoney is not a registered tax agent. If you wish to rely on this letter to determine your personal tax obligations, you should consult with a Registered Tax Agent. In preparing this information, TTLB Investments Pty Ltd trading as wetalkmoney did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, a person needs to consider (with or without the advice or assistance of an adviser) whether this information is appropriate to their needs, objectives and circumstances. Any tax estimates provided in this publication are intended as a guide only and are based on our general understanding of taxation laws. They are not intended to be a substitute for specialised taxation advice or a complete assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent. This information is based on our interpretation of relevant superannuation, social security and taxation laws as at 20 March 2015.