Consider other insurances in super

It can make sense for certain forms of life insurance – usually TPD and/or death cover – to be held in a super fund.

This makes them effectively tax deductible. For example, here is the after-tax cost of a $2,000 premium for death cover for people at varying marginal tax rates:

Marginal Tax Rate Amount Required to Pay After Tax Expense of $2,000 Amount of Tax Paid
30% $2,857 $857
37% $3,174 $1,174
45% $3,636

$1,636

If the same client was able to finance the premium via super, they would only pay 15% tax on the amount that needs to be contributed to super before the premium is paid. This equates to a pre-tax amount of $2,352, with only $352 being paid as tax. The saving is quite substantial, especially for clients in the higher marginal income tax bracket.

If the insured event occurs (that is, the client dies or is totally and permanently disabled), then the insurance payment to the super fund is also usually taxed. This means that 15% of the total amount insured will be payable as tax.

Some advisers see this as a reason not to use super as a way to access life insurance. However, especially for clients in higher marginal tax brackets, this problem is usually better solved by increasing the sum insured to account for the fact that tax will be payable. So, if a client wants their beneficiaries to receive $1 million if they die, the amount insured can be increased to an amount of $1,176,000. Tax at the rate of 15% is then payable if the client dies, leaving their beneficiaries with an after-tax payment of $1 million (15% of $1,176,000 is $176,000). 

The increase in premium payable to move the amount insured up by 17% will typically be less than 17%. This means that, overall, even though the premium increases when the cover is held within super, the overall after-tax situation can still be positive – again, especially when the cover is taken out by a client in a higher marginal tax bracket.

The Dover Group