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LIFE INSURANCE OUTSIDE SUPER?

Superannuation can be a complex issue, with many pest managers not realising the restrictions when it comes to payouts. Lawrence Kennedy of Surety Life outlines the situation. 

Life insurance is an important consideration for everyone, even more so for business owners. There are many types of insurance to consider including; life insurance, total and permanent disability, trauma protection and income protection. It can also be important to consider whether to hold the insurance inside or outside your super.

For most business owners, paying for insurance via super can be a very tax and cost effective way for paying insurance premiums. The tax deduction can be 30% for companies and could be higher for some self-employed individuals. Paying insurance premiums from your superannuation account or employer concessional contributions can also assist business owners when cashflow is tight.

Whilst there are tax deductions, there are also some complexities to be aware of. The insurance for death and TPD (total and permanent disability) 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 that are more generous than what is covered in this article.

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

The main types of insurance in super are life cover, total and permanent disability (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. However, this can no longer be acquired via super due to the change in legislation from 1 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 would not 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% depending on the proportion of the taxed and untaxed element. This 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-dependant (e.g. adult non financial dependent child). The tax 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.

Lawrence KennedySpecialist Risk Advisor, Surety Life

Lawrence Kennedy is a specialist risk advisor with Surety Life and authorised representative of Millennium3 Financial Services Pty Ltd.

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