Most super funds offer their members life and disability insurance, and any employer default fund is required to offer its members a minimum level of life insurance, depending on their age.
How does it work?
Personal insurance is a smart way to protect your quality of life and provide support for your loved ones if you get sick or injured. While you often hear how important it is to have sufficient cover, it’s just as important to be smart about where to structure your insurance – so that the dollars you pay for premiums work harder for you.
Most types of life insurance can be held inside or outside of super. These include:
- Income Protection (IP). Pays a regular monthly benefit if you become severely disabled by sickness or injuries and you are unable to work – potentially helping your partner take time off work to care for you and/or cover mortgage repayments.
- Term Life. Pays a benefit if you die or become terminally ill – helping your family take care of debts and
ongoing household expenses.
- Total & Permanent Disablement (TPD) Insurance. Pays a benefit if you are totally and permanently disabled – helping cover the long-term costs of care for you and your family.
There are advantages and disadvantages to holding insurance inside or outside of super.
Insurance inside super
- IP, Term Life and TPD insurance premiums are generally tax deductible to your super fund
- You can pay your premiums using accumulated super money or by making additional super contributions – which may come from your before-tax income.
- While most insurable events for IP, Term Life and TPD result in a condition of release, there are some limited situations where you may not be able to access the insurance benefits until you retire*.
- The tax rate payable on a portion of death benefit to non-dependants may be up to 32% including Medicare Levy.
*Tax may be payable in certain circumstances. Your financial adviser can provide further information regarding the tax implications for your circumstances.
Insurance outside super
- IP insurance premiums are generally tax deductible.
- Term Life and TPD benefits are generally tax free.
- Insurance benefits are paid directly to you or your nominated beneficiary
- Term Life and TPD insurance premiums are generally not tax deductible when paid for personally.
Tax treatment at a glance
The following table summarises the tax treatment of premiums and payouts (benefits) inside and outside super.
|Type of insurance||Inside super||Outside super|
|Income Protection||Premiums tax-deductible||Yes||Yes|
|Term Life||Premiums tax-deductible||Yes||No|
|Benefits taxed||Tax free to dependants. Taxable if paid to non-dependants (concessions)||Generally tax free|
|Benefits taxed||Taxable (with concessions) if under age 60||Generally tax free|
What does this mean for me?
Whether you have insurance cover inside or outside of super depends on your personal circumstances and needs. By choosing the right combination, not only can you have the appropriate insurance cover to give peace of mind, but you can do it in a cost and tax-effective manner.
Things you should know
This information is general advice only and does not constitute any recommendation or personal advice. It has been prepared without taking account of your objectives, financial situation or needs. It is current at the time of publication 9 December 2020, and is subject to change.
The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. It has not been prepared by a registered tax agent. You should seek independent professional tax advice from a registered tax agent about any liabilities, obligations or claim entitlements that arise, or could arise, under a taxation law.
This information may contain material provided by third parties and is given in good faith and has been derived from sources believed to be accurate at its issue date. Information that has been provided by third parties has not been independently verified and the Westpac Group is not in any way responsible for such information.
This document provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. The information provided is factual only and does not constitute financial product advice. Before acting on it, you should seek independent financial and tax advice about its appropriateness to your objectives, financial situation and needs. The tax position described is a general statement and is for guidance only. It has not been prepared by a registered tax agent. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. BTFM’s financial services guide can be obtained by contacting your adviser, calling 1300 657 010 or visiting bt.com.au. Superannuation is a long-term investment. The government has placed restrictions on when you can access your preserved benefits. The Government has set caps on the amount of money you can add to superannuation each year on a concessionally taxed basis. In addition, the government has set a non-concessional contributions cap. For more detail, speak with a financial adviser or visit the ATO website. This information may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be accurate as its issue date. It should not be considered a comprehensive statement on any matter nor relied upon as such. While such material is published with necessary permission, no company in the Westpac Group accepts responsibility for the accuracy or completeness of, or endorses any such material. Expect where contrary to law, we intend by this notice to exclude liability for this material. All case studies are not real life examples and are for illustrative purposes only. BT14897F-0714lm
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