13
November
2018

Superannuation & Insurance

Superannuation & Insurance

The most common method to hold life insurance is through superannuation. There are a number of benefits in doing it this way, most notably, the fact that the premiums do not come out of your everyday cash flow. There are also tax deductions on life insurance and total and permanent disability (TPD) insurance that are not available if you own the policies directly. However, holding your insurance in super also brings some complexities.

One issue revolves around the superannuation conditions of release being stricter than the benefit payments that insurance companies provide. This is called benefit entrapment. This is particularly relevant with TPD insurance with “own” occupation and many income protection benefits. The Superannuation Act only allows you to access your super if you are unable to work in “any” occupation.  If you have “own” occupation insurance it is possible you will receive a benefit under the terms of the insurance policy, but not be considered to be totally disabled by the Superannuation Trustee. Under these circumstances, your insurance proceeds will have to remain in super.

A standard income protection policy will have a number of features that would result in a benefit, that do not meet the Superannuation Act’s allowances for income replacement payments. These are substantial, things like set benefits, partial payments, CPI increases amongst others. Due to this, for a long while, advisers took the view that, if at all possible, it was best to hold income protection individually.

In recent times, the insurance companies have come up with a method to circumvent the legislation with a feature most commonly known as Super-Link. Essentially, this allows for the bulk of your insurance to be owned and funded by your super, with a small amount to be owned and funded by the individual linked to the policy to cover all the features that are not able to be released under the Superannuation Act.

Another complexity is the taxation associated with insurance held within super. As mentioned earlier, there is a tax deduction for life and TPD insurance which is not available when owned individually. However, there are also some complicated tax implications when a benefit is paid.  In the event of a life insurance claim, the funds form a super death benefit. How this is treated depends on the end beneficiary. If the benefit is being paid to a dependant (as per the Superannuation Act) these funds are tax free. They can also be rolled into Death Benefit Pension or even a Superannuation Death Benefit Trust (these may have long-term tax benefits but also have restrictions). However, if the beneficiary is a non-dependant these funds are taxable at as much as 30%. 

Remember that superannuation doesn’t form part of your estate (unless you actively nominate your estate) therefore, you need nominate beneficiaries to ensure your wishes are carried out.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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