Advantages of funding insurance through super
Funding life insurance through super offers a number of advantages for both clients and advisers. However, maximising the cash flow and super benefits requires smart strategies, as shown by a new IOOF report.
Statistics showing one in five parents will be unable to work or die before retirement age highlight the importance of clients obtaining suitable cover. Particularly for clients with cash-flow issues, funding insurance through super offers a cost effective advantage, while potentially also offering tax advantages through salary sacrificing.
For advisers, the key areas to consider are tax, the type of cover, concession caps, benefit payments and their taxation, along with the potential use of a platform to own the insurance as compared to the partial rollover method of funding.
In IOOF’s Technical Insurance Guide, two examples are shown which highlight the advantages for clients in holding death and total and permanent disability (TPD) cover inside super rather than outside.
In the first example, a married couple with a mortgage are offered $1,000,000 worth of life cover at an annual premium of $1,181. By salary sacrificing into super, the client makes a significant saving of $755 compared to funding the cover using his after-tax salary, with the option of making additional super contributions to fund the cost.
In the second scenario, a single worker is offered a number of options for funding her death and TPD cover, either:
- paying for it out of her after-tax salary
- funding it by making an extra contribution to super
- funding it from accumulated super benefits
- salary sacrificing an additional amount so employer contributions are increased by the premium amount, or
- funding it by an additional employer contribution.
The calculations show option 5 is the best outcome in terms of gross cash flow and increase in super benefits, although the third and fourth scenarios are superior in terms of maximising cash flow.
Other considerations include whether the client is eligible for a government co-contribution if they opt to fund the premium via a non-deductible personal contribution, and the effects of a lower marginal tax rate. For a couple, the primary income earner could consider additional salary sacrificing; splitting part of their contributions into their lower-income earning partner’s super to fund their insurance (of course the receiving spouse must be less than age 65 and if between their preservation age and 65 they cannot be retired)
Tax issues to consider when funding insurance through super are as follows:
- Life insurance premiums are tax-deductible; benefits are tax-free to dependants but taxed up to 31.5 per cent for non-dependants.
- TPD premiums are tax-deductible; benefits are taxed as part of super (note however tax-free after attaining age 60).
- Income protection (IP) premiums are tax-deductible; benefits are subject to income tax.
Funding life insurance through super offers the potential for lower premium costs or even improved cover at no extra cost, as well as providing tax benefits, but it pays to be aware of the right strategies to maximise client benefit. For more tips on taking advantage of funding insurance through super, download IOOF’s report here: http://www.ioof.com.au/insurance#download
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