A: Determining the most appropriate structure to own insurance is dependent upon your age, whether you have a spouse and the age of your other beneficiaries. I will assume that the level of insurance you have is appropriate to your needs.
Typically insurance is owned either under superannuation or in the insured persons name. Ownership of insurance on another party, either a spouse or a business partner has fallen out of favor as it is inflexible and doesn’t accommodate changes in circumstance such as divorce.
Structuring insurance under superannuation is tax effective as the premiums are payable by the fund and are tax deductible to the fund. If you are older and have a longer term need for insurance you need to be mindful of the ongoing costs that can rise. In addition, you may be restricted on contributing to superannuation to fund premiums. If you are over 65 and ceased work, you may have to fund premiums from existing superannuation account balances only.
On death, tax applicable to insurance benefits under superannuation will vary. If your beneficiaries under the superannuation fund is a spouse or someone financially dependent upon you, the proceeds of a claim will be tax free, provided they satisfy the SIS act definition of a dependent.
If however your beneficiaries are adult children who are financially independent or other non dependents, then tax will be payable on the lump sum. So be careful in allowing for any tax liability when determining the amount you wish your beneficiaries to receive.
Insurance owned by an individual will be tax free on death, provided no tax deduction has been claimed on premiums for the insurance or beneficial ownership of the policy has not changed.
Identify how long you are likely to need the insurance for, who the beneficiaries are and what taxes are likely to be paid on a death benefit. Get advice if you are unsure of the consequences of your insurance ownership on your death. Insurance should be structured to ensure that the right money goes to the right people at the right time, with as little tax impact as possible.
This article was published in The Australian on 14 April 2012. For a direct link to the article click here