By Andrew Sherlock
With the cost of living on the rise, we are seeing increasing queries about life insurances.
At times like this it’s easy to think that reducing insurance premiums are a good way to save money, but it isn’t always that simple.
In fact, in periods of uncertainty it’s more important than ever to have a financial safety net in place that protects us and our families.
There are ways to structure our life insurances that can work for us, which is why it’s a good idea to review them regularly, rather than have a ‘set and forget’ mindset.
For example, it’s useful to understand how life insurance policies work and how premiums and payments are affected by tax. There are also options of purchasing some life insurances through your super fund or SMSF.
Various types of life insurance
Life insurance is an umbrella term for a range of policies that cover different situations. They include:
- Life cover, which pays out on your death or terminal
- Income protection, which provides a replacement income if you’re unable to work because of illness or injury.
- Total and permanent disability (TPD) insurance provides a lump sum payment if you become permanently disabled and are unlikely to return to work.
- Critical illness or trauma insurance pays a lump sum on the diagnoses of certain medical conditions regardless of your ability to return to work.
- Business expenses insurance covers ongoing fixed business costs if you’re a business owner suffering serious illness or injury.
Tax benefits and deductions
The premiums for most types of life insurance are not tax deductible, but there are exceptions.
Premiums for income protection are usually personally tax deductible if you own the policy. A super fund can also own income protection insurance and the premium is usually tax deductible to the fund. Business expenses insurance premiums are also tax deductible.
Conversely, income protection insurance payments are treated as assessable income and must be declared in your tax return and will be taxed at your marginal rate. Business expense insurance payouts are also taxable.
You are not usually able to claim a tax deduction on the premiums paid for a life, TPD or trauma insurance policy that is personally owned. Proceeds from such policies would usually be tax free.
Inside super or outside?
Life cover, income protection and some types of TPD insurance can be purchased through your super fund.
Many Australian employees have some form of life insurance, often through their superannuation fund. However, this is often only a basic level of cover so it’s a good idea to check to see if it’s adequate for your needs.
If you have a self-managed super fund (SMSF), you are required to consider whether to hold life
insurance for each of the fund’s members.
Super pros and cons
You will need to do the sums for your circumstances, which is where an adviser can assist, but there may be an advantage to using your super to pay the premiums. Whereas life and TPD insurance premiums are not personally tax deductible, they are a tax-deductible expense of your super fund. This can reduce the after-tax cost of the insurance to you as well as boost your personal cash flow.
The tax treatment of benefits paid out of super varies according to the type of policy and your situation, so it’s important to talk to an adviser.
Generally, life cover paid to someone who’s financially dependent on you (typically a spouse and children under 18 years) is not taxed. But if the beneficiary isn’t your financial dependent, they can expect to pay tax. TPD proceeds paid out of super are also taxable.
The main drawback to paying insurance premiums through super is that you’ll be reducing your super balance, which means you may have less for retirement. However, you could choose to boost your balance using salary sacrifice or personal contributions.
Your safety net checklist
- Decide on who and what needs to be financially protected if something should happen to
- Weigh up the best type of life insurance to meet your
- Be clear about any tax implications of an insurance
- Make sure the policy benefit is adequate and check it
Making decisions about the type and amount of life insurance cover you need and how to structure it is complicated, so it’s probably best to seek professional advice. Reach out to the Sherlock Wealth team here.
Andrew Sherlock is the Owner & Head of Advice at Sherlock Wealth.
A Sydney-based financial planning firm, Sherlock Wealth has been helping successful families, business owners and individuals with their wealth creation and wealth protection needs for more than two generations.
A Chartered Accountant with a background in funds management, Andrew’s career spans more than 30 years. Andrew was one of the first people in Australia to obtain the Self-Managed Superannuation Specialist accreditation and is one of only a few advisers in Australia to be a Certified Investment Management Analyst. He is a lifetime member of the international MDRT Top of the Table and holds a BA Economics degree from Macquarie University with majors in accounting and finance.
Helping clients achieve their lifestyle goals through smart investing and asset management, wealth structures, and strategic planning are the cornerstones of what Andrew and the team at Sherlock Wealth provide.
Andrew can also be contacted at [email protected].
i Insurance through super – Moneysmart.gov.au
