Q . I have read that I should always hold my life insurance inside Superannuation. Why is this and what is the difference between owning insurance inside and outside of Super? I have Death and Total Permanent Disability insurance provided by my Employer via my Superannuation fund. I am 38 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.
A. When considering whether to hold life insurance inside or outside super, you need to factor in your personal circumstances, your insurable need and the tax consequences applicable to the premiums and more importantly the death proceeds.
A major advantage to you of structuring your insurances under Superannuation is that the premiums are 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 your after tax dollars.
Often the premium costs of Life Insurance held in an Employer Superannuation fund are at Group rates and should be priced at a lower rate compared to what you can secure via individual retail cover outside of Superannuation.
Before making any changes, check the level of cover you have, compare the features and benefits of the cover and the terms and conditions of the insurance contract.
Whilst funding insurance costs from Superannuation as opposed to post tax cash flow is attractive, it does come with some negatives that need to be considered.
The purpose of Superannuation is to fund retirement. Insurance costs will eat into your retirement savings and impact on your long term rate of saving for retirement.
If your employer pays your insurance premiums as an employee benefit under Superannuation, the cost of the cover will count as a contribution towards your Superannuation Concessional Contribution Cap of $25,000. This may limit your ability to Salary Sacrifice Superannuation contributions.
Generally speaking in the event of death, insurance proceeds on policies self-owned outside of Superannuation are tax-free to beneficiaries. However, with Superannuation, you need to be very careful as tax treatment will vary depending on who you nominate as beneficiaries. If proceeds are payable to a tax dependent; Spouse, a child under 18 or someone financially dependent upon the member, the proceeds are tax-free. 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%.
These tax consequences are quite substantial. You may argue that your dead so what? Ultimately this 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 of your death for beneficiaries and also options you have with the insurance to minimise the tax impact. If you are in the 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 the payout of the insurance benefit whilst you are still alive. You may 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.