Personal insurance is necessary to protect your family’s future if the unexpected happens or tragedy strikes. But it’s also important to make sure you buy it in a tax-effective way.

 

Benefit from up-front tax concessions
If you buy personal insurances such as Life and/or Total and Permanent Disability (TPD) through your super fund, you may be able to take advantage of a range of ‘upfront’ tax concessions generally not available when insuring outside super.

For example:

• if you’re eligible to make salary sacrifice contributions, you may be able to buy insurance through a super fund using pre-tax dollars (read the case study below)
• if you earn less than 10% of your income from employment (e.g. you’re self-employed or not employed), you may be eligible to claim your super contributions as a tax deduction [1], and
• if you earn less than $50,454 pa, of which at least 10% is from employment or a business, and you make personal after-tax super contributions, you may be eligible to receive a Government co-contribution of up to $500 that could help you cover the cost of future insurance premiums. [1]
These concessions can make it cheaper to insure through a super fund, or help you get a level of cover that may not, otherwise, have been affordable. [2]

 

Case study
Jack, aged 44, is married to Claire, aged 41. Claire is taking a break from the workforce while she looks after their young children. Jack works full-time, earns a salary of $100,000 pa and they have a mortgage.
After assessing their goals and financial situation, their adviser recommends Jack take out $700,000 in Life & TPD insurance so Claire can pay off their debts and maintain the family’s financial position should he die or become totally or permanently disabled. The premium for this insurance is $1,0463 (in year one) outside super. [3]
Their adviser also explains it will be more cost-effective if he takes out the insurance through his MLC Wrap super account. This is because if he arranges with his employer to salary sacrifice the insurance premium into his super account, he’ll be able to pay the premiums with pre-tax dollars. [4]

On the other hand, if he purchases the cover outside super:
• he’ll need to pay the full premium of $1,046 from his after-tax salary, and
• he will also pay income tax of $669 (after taking into account his marginal rate of 39% ) on the part of his income required to fund the insurance premium. [5]

By insuring in super he could make a total effective saving of $669 on his first year’s premium.

Note: This case is for illustrative purposes only and has been prepared to highlight the importance of speaking to a financial adviser about the benefits of insuring in a super fund. It’s important that you don’t erode your super balance as a result of having premiums deducted from super. This can be prevented by ensuring sufficient contributions are made to cover premium deductions.
A financial adviser can also identify a range of other opportunities to make your insurance more cost-effective over the longer term.

More positives

Another benefit of insuring through your super account is you can have the premiums deducted from your super balance, without making additional contributions to cover the cost.
This can help you afford insurance if you don’t have sufficient cash flow to pay for it outside super. It may also free-up cash flow to help you take out other important insurances such as Critical Illness, which can generally only be purchased outside super.
Critical illness insurance may provide you with a lump sum payment to pay medical, rehabilitation and other expenses if you suffer one of a number of specified critical illnesses such as cancer, heart attack or stroke.

Protecting your income

Another type of insurance to consider is Income Protection, which can replace up to 75% of your income if you’re temporarily unable to work due to sickness or injury.
If you take out Income Protection insurance in a super fund, you can:
• make super contributions to fund the premiums and benefit from the range of upfront tax concessions, or
• arrange to have the premiums deducted from your existing account balance, without making additional contributions to cover the cost.

Alternatively, if you purchase the cover outside super, you can generally claim the premiums as a tax deduction. The best approach for you will depend on a range of factors, including the tax implications.

To find out more about the benefits of insuring through super, please contact Melbourne: 9654 0555, Geelong: 5229 0577 or Colac: 5232 1200

Note: Unless stated otherwise, this article does not take into account any of the measures announced in the 2016 Federal Budget that has a proposed date in future financial years.

Footnotes:
1. Includes assessable income, reportable fringe benefits and reportable employer super contributions. Other conditions apply.
2. This will usually also be the case if the sum insured is increased to make a provision for any lump sum tax that may be payable on TPD and death benefits in certain circumstances.
3. This premium is for a 44-year old non-smoking male, is based on MLC’s Life cover Super standard premium rates as at February 2015 and includes the policy fee.
4. Because super funds generally receive a tax deduction for death and most disability premiums, no tax on contribution is generally deducted from salary sacrifice super contributions.
5. Applies in the 2015/2016 financial year and includes a Medicare levy of 2%. Calculation of pre-tax income required to fund insurance premium:
– A. Pre-tax part of income for funding premium = $1715
– B. Tax on A. is A. x marginal tax rate $1715 x 39% = $669
– C. Post tax part of income for funding premium A.-B.= $1715 – $669 = $1046