Q. I have read that I should always hold my life insurance inside Superannuation. I have Death and Total Permanent Disability insurance provided by my Employer via my Superannuation fund. I am 48 single with no kids. On my death I plan to leave my estate to my parents and charity. I have sufficient Disability cover to pay off my mortgage if I can’t work again. What is the difference between owning insurance inside and outside of Super?
A. When considering whether to hold life insurance inside or outside super, you need to consider your personal circumstances, the insurable need and the tax consequences applicable to the premiums and more importantly the death proceeds.
The advantage to you of holding the insurance via Super is that as it is an employer plan, the premiums typically will be priced at a lower rate compared to what you can secure via retail cover.
Premiums are also paid from your accumulated Superannuation fund balance or from pre-tax Superannuation contributions. If you were paying for Life Insurance outside of Superannuation you would have to fund the cost from after tax dollars.
However whilst there are advantages with premium payments, you need to be very careful with the tax consequences on death. As your end beneficiaries are non-tax dependent, it may be better to hold the life cover outside of super.
If proceeds are payable to a tax dependent; Spouse, child under 18 or someone financially dependent upon the member, the proceeds are tax free. In your situation, this is not the case.
Assuming your parents do not rely on you for ongoing financial support, if proceeds are payable to a non-tax dependent such as your parents or a charity, the death benefit proceeds are taxed at 15% or where the Super fund has claimed a tax deduction for the insurance premiums, the proceeds are taxed at 30%.
The tax consequences are quite substantial. You may argue that your dead so what? It becomes a question of who you want to benefit; your beneficiaries or the ATO. By careful planning you can manage this risk and provide as much benefit as possible for those you wish to provide for.
It is important to understand the tax consequences on your death for beneficiaries and also options you have with the insurance to minimise the tax impact.
If you are in the unfortunate position of knowing you will die in the foreseeable future; for example if you were suffering from Cancer, please get advice urgently on the options available to you on payout of the insurance benefit whilst you are still alive. You may also be able to manage how and to whom the proceed are paid via your death benefit nominations. Better to give to charity or loved ones than Canberra!