Make Insurance More Affordable with Superannuation
Life and Total and Permanent Disability (TPD) insurance can provide critical financial protection for you and your family, but the cost of premiums may deter some people. By using superannuation to pay for insurance, you can take advantage of tax concessions and streamlined payment options to make coverage more affordable.
How the Strategy Works
Holding life and TPD insurance through your super fund offers several benefits:
Use Pre-Tax Dollars:
Salary sacrifice contributions can be used to pay insurance premiums through super, effectively utilizing pre-tax income and reducing your out-of-pocket costs.
Personal contributions made to super can also be claimed as a tax deduction, regardless of whether they are used to purchase investments or insurance within the fund.
Government Co-Contribution:
If you earn $60,400 or less annually, making personal after-tax contributions may qualify you for a government co-contribution of up to $500, which can offset future insurance premium costs.
Account Balance Payments:
Premiums can be deducted directly from your super account balance without requiring additional cash flow from your personal income. This is particularly useful if you have limited disposable income.
Case Study: Justin’s Savings
Justin, aged 44, earns $150,000 per year and requires $1.5 million in life and TPD insurance to protect his family.
The premium cost is $2,200 annually. By arranging a salary sacrifice of $2,200 into his super, Justin pays the premium with pre-tax dollars. If he paid the same premium outside super, he would need $3,607 in pre-tax income due to his marginal tax rate (39%, including Medicare levy).
By insuring through super, Justin saves $1,407 in pre-tax dollars, translating to an after-tax saving of $858.
Other Benefits of Insuring Through Super
Cash Flow Flexibility:
Premium payments do not require immediate out-of-pocket expenses.
Income Stream Options for Benefits:
In some cases, death or TPD benefits can be paid as a concessional income stream rather than a lump sum, which avoids lump sum tax and provides steady financial support for dependants.
Tax-Effective Estate Planning:
Benefits paid to dependants from super can enjoy tax concessions, potentially increasing the net benefit to your family.
Important Considerations
While insuring through super can be advantageous, there are key trade-offs and issues to consider:
Impact on Retirement Savings:
Using super to pay premiums reduces the funds available for retirement, potentially affecting long-term savings.
Tax Implications for Benefit Payments:
Lump sum payments for death or TPD benefits may be taxable if paid to non-dependant beneficiaries.
Contribution Caps:
Contributions made to cover insurance premiums count towards annual concessional or non-concessional contribution caps. Exceeding these caps may lead to significant tax penalties.
Super Fund Rules:
Ensure your super fund allows for insurance premium deductions and that the policy meets your specific needs.
Strategic Tips for Making the Most of Super-Linked Insurance
Combine Contributions:
Maximize concessional contribution caps by using salary sacrifice or personal deductible contributions to cover premiums while boosting retirement savings.
Leverage Co-Contributions:
If eligible, use government co-contributions to offset premium costs and enhance overall value.
Optimize Policy Structure:
Work with a financial adviser to determine the appropriate level of cover, ensuring premiums remain affordable without compromising long-term retirement goals.
Regular Reviews:
Review your policy regularly to ensure it remains relevant and cost-effective as your financial and personal circumstances change.
