Q. What are the advantages of owning insurance inside Super? I have life insurance provided by my employer via my superannuation fund. I am 53, divorced with 2 adult children who do not rely on me for financial support. My children are the nominated beneficiaries of my Superannuation benefits.
A. When considering whether to hold life insurance inside or outside super, you need to consider your personal insurable needs, any tax benefits applicable to the premiums and more importantly the tax consequences applicable to the death proceeds.
An advantage of holding insurance via superannuation in an employer plan is that the premiums typically will be priced at a lower cost “group” rate compared to what you can secure via personal retail cover. This is always worth checking when comparing offers of insurance.
Insurance premiums paid from superannuation are paid from your accumulated superannuation fund balance or often from pre-tax superannuation contributions. If premiums are being funded by making additional super contributions, these may attract various tax or other government benefits potentially making it a more efficient way to fund your premiums.
On the other hand, if you were paying for life insurance outside of superannuation you would have to fund the cost from personal after-tax income. So if your cash flow is tight or you are focussing on paying off a mortgage or personal debt, it can be advantageous to have your insurance costs funded from your superannuation.
One disadvantage of using superannuation to fund your insurance is that the cost of insurance premiums can impact your long-term retirement savings.
You also need to take into consideration the tax consequences on your death. Generally speaking, if you own the insurance outside of superannuation, the proceeds are tax-free unless the policy ownership has changed, whereby a Capital Gains Tax liability may apply in certain circumstances.
The tax on superannuation death benefits varies and you need to be very careful and understand what tax liabilities may exist. If proceeds are payable as a lump sum to a tax dependent; such as a spouse, children under 18, or someone financially dependent upon you or in an interdependency relationship with you, the proceeds are tax-free.
When superannuation benefits, containing insuranceproceeds, are paid as a lump sum to non “tax dependent” beneficiaries such as independent adult children, the taxable portion of the benefit will be subject to tax. Part of this taxable component will be taxed at 15% (plus Medicare Levy), while the remainder will be taxed at 30% (plus Medicare Levy). Therefore you would need to consider carefully these tax consequences and whether it may be better to hold the life cover outside of superannuation.
If you are in the position of knowing you will die in the foreseeable future; for example, if you were suffering from terminal cancer, please get advice urgently on the options immediately available to you. You may be able to have your superannuation and insurance benefits paid out whilst you are still alive, thereby minimising the tax implications. You may also be able to manage how and to whom the proceed are paid via your superannuation death benefit nomination or via your Will.
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. By careful planning of who receives benefits from either within or outside superannuation, you can manage this risk.
Ultimately you should be aiming to have the right amount of money go to the right people, at the right time. Ensure your Will is up to date and reflects your wishes. Consider utilising a non-lapsing binding nomination for your superannuation benefits so the trustee of the fund has no discretion in terms of distributing your superannuation entitlements.
Q. My wife and I have no children and own our house with no debt. Do we still need personal life insurance?
A. The purpose of insurance is to maintain the status quo in the event of an unforeseen event. If you have sufficient assets to maintain your lifestyle at an accepted level in the event of disability, then it would be hard to see a need for Income Protection or Total and Permanent Disability. Likewise, if the surviving spouse does not require funds to repay debt or replace income on the partner ’s death, life insurance may not be required.
If you feel you have no insurable need, “stress test” your thesis. Work through the scenarios on a “what if basis”. Consider the impact of unexpected medical care or rehabilitation costs. Likewise the loss of income to care for a spouse. Make sure you take into consideration your short and long-term financial planning needs. For example, would your retirement funding goals be met if you couldn’t work?
If you have satisfied yourself that you are financially secure both now and under any insurable scenario, then you may not need insurance. I would encourage you to get a financial planner to confirm your view. Before cancelling any insurance, please see your Doctor for a full medical and blood test, just in case.