Consider life insurance in super
Many, if not all, managed super funds offer various forms of life insurance. Given the generally-tax advantaged nature of super, these forms of life insurance can often be cheaper to the client. What’s more, if the client is already a member of a particular fund, they can be relatively easy to establish.
As a general proposition, premiums for total and permanent disability (TPD) cover and death cover are not deductible in the hands of individuals paying directly for these types of insurance. That is, if a client purchases these policies directly, the client cannot offset that premium against their income when calculating their tax liability.
However, if the policy is held by the client’s super fund the client effectively receives a tax benefit.
This is because the contributions that were paid into the fund to finance the insurance premiums are taxed at just 15%. This means that to pay an insurance premium of $100 within a super fund, the client needs only to have earned $117 pre-tax and contributed this amount the super fund (15% of $117 is $17). If the client has a personal marginal tax rate of 30%, by contrast, then that client will need to earn $142 pre-tax in order to pay the $100 premium in their own name (30% of $142 is $42).
Frequently, an even greater benefit falls to clients whose personal income has many demands on it. This is because premiums paid out of super benefits do not impact on day-to-day cash flow. In many cases, clients are seeking insurance precisely because there are various demands on their personal income. Parents of dependent children are probably the largest group here. Raising children is expensive, and these parents are frequently also trying to do things like pay off home loans as well. To be able to access the all-important life insurance in a way that does not make any further demands on today’s cash situation is an appealing prospect.
Because of all this, SOAs frequently fail when they ignore super as a way to access life insurance. Put simply, an SOA that doesn’t make use of super needs to demonstrate the specific reasons why a non-super option has not been recommended.