Due to superannuation reforms over the last decade, many Australians these days have Life Insurance, Trauma Insurance and Total and Permanent Disability Insurance (TPD) of some sort. Do you know what you have?
Did you also know though that further legislative change in 2007 can affect how much money you (if you are totally and permanently disabled) or your beneficiaries – quite often your spouse and children – receive (if you die)? this can depend on who owns your Life/TPD Insurance policy. Let’s explain by looking at the different options.
There are generally three different options available to most people:
1). Super-owned: Your superannuation fund owns the policy in your name. The premiums are paid for through contributions to the fund made by either you or your employer (with either pre-tax or after-tax dollars), or deducted from the balance of your fund,
2). Employer-owned: Your employer owns the policy in your name and pays the premiums,
3). Self-owned: The policy is in your name and you pay the premiums with your own money.
Super-owned insurance
Prior to July 2007, there were certain restrictions from a taxation perspective that made this form of ownership less attractive for self-employed persons or those with a high income level.
Since 1 July 2007 however, super ownership has generally become a far more attractive and simpler proposition. All benefits paid to a “dependant” for taxation purposes will be tax-free. Dependants include a spouse of the deceased and a child under 18. Keep in mind though that tax will still apply where the benefits are paid to “non-dependants” (for example financially independent adult children).
Sounds good right? It gets better. The premiums for the insurance can be funded with pre-tax income (i.e. by salary sacrificing) and/or from the superannuation balance itself. The danger with funding your insurance premiums from your superannuation balance is that it could have a negative long-term impact on your retirement, but it could come in handy if your cash flow is tight at a particular time or you are self-employed and your income receipts are irregular.
Lastly, self-employed people are now allowed to claim a full tax deduction (subject to legislated limits) on the amount contributed to superannuation, whereas they previously could not. As super is so tax-effective there are limits to how much you can contribute so you should seek our advice before you implement such strategies.
If you are TPD, the payment made from your TPD insurance (paid via your super fund) is now also improved – all payments to people aged 60 years and over will be tax free. Tax on both lump sums and pensions for people under age 60 has also improved (for both employees and self-employed people). There is no tax on the lump sum amount if you transfer your lump sum to a pension.
Employer-owned insurance
Where your employer has arranged Life insurance for you and your are injured or die, any benefit paid to you or your beneficiaries is paid as an “Employer Termination Payment”.
The changes that came into effect on 1 July 2007 mean that any payment of this nature only receives favourable tax treatments up to a certain cap. For the 2007-08 financial year, this cap was $140,000. Amounts paid above $140,000 will generally attract the highest marginal tax rate of 46.5% (including Medicare Levy) which makes this a relatively unattractive way to arrange insurance from the employer and employee’s perspectives.
Accordingly, many employers are investigating re-locating these arrangements to super.
Self-owned
This is the most straight forward way of arranging Life insurance and TPD insurance – you pay the premium yourself and you or your beneficiaries receive the benefits tax-free.
Unfortunately you pay the premiums out of your own pocket (in “after-tax dollars”) and get no tax break. If you try and salary package these premiums (i.e. have your employer pay them for you and charge back to your package), your employer will be liable for Fringe Benefits Tax (FBT), for which the tax rate is 46.5% (including Medicare Levy). It is likely your employer will charge this back to your package on top of the premium.
So, what should you do know?
Well, the right amount of income cover and appropriate ownership option will depend on your circumstances and objectives. Check any existing superannuation statements or insurance policies to see how much cover you have. Then seek advice on the most appropriate way to reduce or remove the gap between your current level of cover and the right level of cover.
To ensure you get the advice most appropriate for you, contact us to identify any gaps that may exist and for a full analysis of your income protection needs.