BEGINNERS GUIDE TO SUPERANNUATION
Obtaining life insurance through super
In addition to providing for a member’s retirement, benefits in super funds can be used to purchase certain types of life insurance (sometimes known more generally as ‘risk insurance’).
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 member. What’s more, if the person wanting insurance is already a member of a particular fund, the new policy 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 person purchases these policies directly, the person cannot offset that premium against their income when calculating their tax liability.
However, if the policy is held by the person’s super fund the member 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 p 8 Beginner’s Guide to Superannuation 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 members whose personal income (ie their money outside of super) 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, people 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 parents are frequently also trying to do things like pay off home loans as well. To be able to access important life insurance in a way that does not make any demands on today’s cash situation is an appealing prospect.
Super funds can be used to obtain the most common forms of risk insurance: life cover, TPD or income protection. As this ebook is a guide for super, we will not go into risk insurance in too much detail. But please be aware that these insurances can often be obtained within super, and paying for them in this way is often the most cost-effective way of doing so.