Insurance within Super

If you buy personal insurances such as Life and Total and Permanent Disability through a 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 an employee and are eligible to make salary sacrifice contributions, you may be able to buy insurance through a super fund with pre-tax dollars (see case study)

If you earn1 less than 10% of your income from employment (eg you’re self-employed or not employed), you can generally claim your super contributions as a tax deduction – regardless of whether your contributions are used by the super fund to purchase investments or insurance, and
if you earn1 less than $61,920 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 $1,000 that could help you cover the cost of future insurance premiums.
These concessions can make it cheaper2 to insure through a super fund, or help you get a level of cover that, otherwise, might not have been affordable.

Case Study
Jack, aged 45, 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 insurance so Claire can pay off their debts and replace his income if he dies. The premium for this insurance is $827 in year one.

Their adviser also explains it will be more cost-effective if Jack buys the insurance in a super fund. This is because if he arranges with his employer to sacrifice $827 of his salary into super, he’ll be able to pay the premiums with pre-tax dollars4.

Conversely, if he purchases the cover outside super:
he’ll need to pay the premium of $827 from his after-tax salary, and
after taking into account his marginal rate of 38.5%5, the pre-tax cost would be $1,345 (ie $1,345 less tax at 38.5% [$518] equals $827).
By insuring in super he could make a pre-tax saving of $518 on the first year’s premium and an after-tax saving of $318, when you take into account his marginal rate of 38.5%.

Furthermore, if he maintains this cover for 20 years, the after-tax savings from insuring in super could amount to $18,413 (in today’s dollars).
Note: This case study is for illustrative purposes only and has been prepared to highlight the importance of speaking to a financial adviser Financial Advisor about the benefits of insuring in a super fund. A financial adviser can also identify a range of other opportunities to make your insurance more cost-effective over the longer term.

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

Don’t Forget To Protect 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 outlined earlier, 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, You Should Speak To One Of Our Financial Planner, Who Can Tailor A Protection Plan For Both You And Your Spouse.

Footnotes:

• Includes assessable income, reportable fringe benefits and reportable employer super contributions. Other conditions apply.
• 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.
• This premium is for a 45-year old non-smoking male, is based on MLC Limited’s standard premium rates as at 1 September 2010 and excludes the policy fee.
• Because super funds generally receive a tax deduction for death and disability premiums, no contributions tax is deducted from salary sacrifice super contributions.
• Applies in the 2010/11 financial year and includes a Medicare levy of 1.5%.