How do you hold your insurance?
Some types of life insurance can be taken outside or inside superannuation. So how do you know which ownership structure is right for you?
For most people who have a family and other responsibilities, the decision to hold life insurance should be relatively straight-forward. Somewhat less straight‑forward may be the question of how you hold it – ie inside or outside your super fund?
There are some important advantages and disadvantages of each ownership structure that need to be considered when you’re setting up your personal risk insurance. These can also depend on your circumstances, which is why it’s so important to get a regular review of your cover.
1) You might have some already. If you’re an employee, you may already have some death and total and permanent disability (TPD) cover in your super fund. This can be an easy and cost‑effective way to get basic cover without the usual medical tests.
2) You can pay premiums using super. Super funds can claim a tax deduction for some insurance premiums paid inside the super fund. This means your insurance premiums may be effectively paid with pre-tax dollars. This can help you take a higher amount of cover and use the tax savings to cover the additional premiums.
3) You can salary sacrifice. If you want to pay your insurance premiums inside super but don’t want to reduce your retirement benefits, you can top-up your super by setting up a salary sacrifice arrangement. However, if you do this you need to keep an eye on your concessional contributions caps (see below).
1) You can protect your income tax‑effectively. Income protection premiums are generally tax deductible outside super – meaning there’s no tax benefit to holding this cover inside super.
2) You can use your concessional contributions caps for super, not insurance. There’s a limit to how much you can contribute tax-effectively to super each financial year. Currently, the limit is:
• $25,000 per year if you’re under age 50, or
• $50,000 per year if you’re age 50 or over (this is a transitional cap that applies until 30 June 2012).
If you have sizeable insurance premiums inside super and you need to make additional contributions to pay them, you could be limiting how much you’re able to put away tax-effectively for your retirement.
3) Your benefit is easier to access. Outside super, you are the owner of the insurance policy, and any benefits are paid directly to you or your beneficiaries. Inside super, the super fund owns the policy and your super account receives any benefits. To get that money out of super, you then have to satisfy a ‘condition of release’. If you don’t, you may have to wait until your retirement age to get this money out of your super account.
A good time to get smart with your insurance
With 30 June approaching, it’s a good time to review your insurance needs to make sure you have the right cover in place, and that you’re making the most of the strategies available. For advice specific to you and your family, talk to your SWP adviser today.