Life Shield - Your Life, Your Protection, Personal Insurance

Personal Insurances within Superannuation?

 

With changes in recent legislation the ability to place life insurance products under superannuation has broadened. It is now commonly accepted that products such as Death Cover, Total and Permanent disability and Income Protection policies can now be funded via Superannuation funds.


Having Risk insurance policies owned by superannuation funds has advantages and disadvantages. Whenever advising clients regarding this complex strategy, it is crucial that the following rule be followed: When considering Personal Insurance under super ensure that you have compared both the super ownership to non super ownership.

Product Advantages of Super ownership Disadvantages of Super ownership
Life Insurance Life Insurance
*Your pre-tax super contribution can be used to fund the premiums allowing larger sums insured, rather than funding premiums from post tax earnings.

*Benefits paid are generally tax free when paid to a dependant
*Benefits paid to non-dependents are separated into normal superannuation components which will include taxed and untaxed components. Untaxed component attracts tax up to 31.5% (depending on components).

*When paid to an Estate, tax will be determined upon whether the beneficiary of the estate was a dependant or not.

*You should always take into consideration additional contributions to your fund to ensure your retirement balance is not eroded.
Total and Permanent Disablement (T.P.D) *Your pre-tax super contribution can be used to fund the premiums allowing larger sums insured, rather than funding premiums from post tax earnings.

*In circumstances where TPD linked to the Death benefit, where superannuation ownership is recommended you may consider insurance companies that allow the Death benefit to be owned under super, yet the TPD cover is held outside of super. This can be a more affordable and advantageous outcome from a cost and benefit position.
*For a T.P.D benefit to be released it must meet a condition of release under the SIS legislation. This means that some TPD definitions, including “own occupation” and “Home maker ” definitions may result in the benefit being retained in the super fund until a SIS condition of release is met. This can financially disadvantage a client as benefits may not be available to them until retirement.

*Lump sum TPD benefits under super are not Tax free, they generally are outside of super. It is critical that you understand the potential tax consequences of a TPD payment under super.

*You should always take into consideration additional contributions to your fund to ensure your retirement balance is not eroded.

*From July 2011 deductibility for own occupation TPD and loss of limbs benefits was removed.
Trauma Insurance *Unlike, Death, TPD and Income Protection (salary continuance) trauma premiums are not tax deductable to a superannuation fund. This means if Trauma insurance is held within superannuation, contributions into the fund to cover the trauma premium could effectively be subject to contributions tax.

*where you have already reached retirement age, are still working and the purpose of the trauma cover is in line with the superannuation “sole purpose test”, consideration of trauma under super may offer cash flow advantages.
*The trust deed may need to be altered to make trauma acceptable, this will need to stand up to audit issues in relation to the sole purpose test.

*For a Trauma benefit to be released under a Super fund, the client must meet the definition under the trauma contract, but also a condition of release under SIS, including permanent incapacity or retirement. If a condition of release isn’t met the trauma benefit will be held in the super fund until such time as a condition of release is met. Given the purpose of trauma cover, this should be given very close consideration due to the release issues.

*You should always take into consideration additional contributions to your fund to ensure your retirement balance is not eroded.
Income Protection *As Income Protection premiums are deductable to the trustee, the insured can fund the premiums from pre taxed earnings rather than post tax earnings. This advantage is countered however, by the fact that Income Protection premiums outside of super are also tax deductable to the individual.

*Taxation of Income Protection benefits under super are consistent with ownership outside of super. The benefit will be taxed as income in the clients hand at the relevant marginal rate.
*The benefit paid for temporary incapacity under a super fund must not exceed 100% of the insured pre disability income. This questions the validity of agreed value contracts, particularly if the clients income drops or their working hours reduce whilst the contract is in place.

*If an agreed value contract is owned under super and the benefit exceeds the client pre disability earnings the additional benefit will be held in the super fund until a condition of release is met, this may your retirement at preservation age.
*Additional benefits under income protection policies may not be release as they do not meet a SIS condition of release of or the benefit paid exceed the clients pre-disability income these include: Income Protection trauma benefits, claims booster, rehab benefits resulting in an additional % of monthly benefit
*Partial disability benefits may also result in more than pre-disability earning being paid, particularly where the offset is made against the highest pre disability earning over a period of several years, not the pre disability earnings immediately prior to disablement.
*Issues may also arise in total disablement, where by “no income offset clauses” are offered, or whereby you can work a certain number of hours per week and still received total disability benefits.
*You may forgo auxiliary benefits of an Income Protection contract offered under normal retail policies.
*You should always take into consideration additional contributions to your fund to ensure your retirement balance is not eroded.

Note that even though Life Shield has taken care in ensuring that the above information is as complete as possible, the above is general advice and does not take into consideration your personal situation and objectives. It is important to receive personal advice when considering your implications when considering a choice between superannuation and personal ownership of personal insurances. Speak to Life Shield.

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CORRECTIONS REQUIRED:

After having had my income protection, with a company based abroad, for the last 15yrs I recently decided to sort it here in Australia.(Now based here so it makes sense.)
Needless to say the thought of trying to get a similar product for a good price was a concern....

Dr S.T (BDSc)
Dentist
Newman, WA.


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