Insurance inside super has tax advantages
One of the most significant advantages of holding insurance policies inside superannuation is the tax deduction for life and disability premiums that go towards paying out a disability superannuation benefit, according to a leading technical specialist.
.
Craig Day, head of technical services for Colonial First State, said in the latest SMSF Adviser podcast that most advisers would agree that income protection insurance inside super is not common – and for good reasons.
“However, it’s not entirely unheard of within SMSFs. The complexities arise in the idiosyncratic ways of getting benefit payments out and the conditions we need to consider,” Day said.
“For Total Permanent Disability, when a member suffers a total and permanent disability, the focus shifts to getting those benefit payments out. This includes understanding the types of policies you can own inside superannuation and the cashing restrictions and conditions of release rules.”
One of the significant advantages of holding policies inside superannuation is the tax deduction for life and disability premiums that go towards paying out a disability superannuation benefit.
“Inside super, TPD has to align with the cashing restriction, which looks at an 'any occupation' definition. If you want 'own occupation,' strategies exist for linking policies inside and outside super,” he said.
Another key advantage is that the value of the tax deduction means those premiums are being paid with pre-tax money. This can result in a better net cost outcome. Also, many prefer holding insurance inside super because it doesn't impact their personal cash flow, which is crucial, especially now with the rising cost of living.
However, one thing to consider regarding holding insurance inside super is that the taxable component included in the payment is taxed at 20 per cent, plus Medicare, if the member is under age 60.
“However, even with this tax consideration, the overall benefit often outweighs the cost when you compare the level of cover you can get for the same after-tax cost,” he said.
Large APRA-regulated funds may offer cheaper premiums through group life policies, but these policies are owned by the trustee, and terms can sometimes change unfavourably.
“In contrast, SMSFs offer the flexibility of holding standalone retail policies with features not available in group policies, such as worldwide cover. Additionally, the member as trustee deals directly with the insurer, which can expedite the claims process,” Day said.
“However, advisers need to understand the compliance risk of ensuring the policy aligns with SIS conditions of release. They must be familiar with the fund's rules and the nuances of administering these funds. Compliance errors can lead to significant issues, so a thorough understanding of the cashing rules and the administration of SMSFs is essential.”
Keeli Cambourne
July 30 2024
smsfadviser.com
Hot Issues
- ATO encourages trustees to use voluntary disclosure service
- Beware of terminal illness payout time frame
- Capital losses can help reduce NALI
- Investment and economic outlook, August 2024
- What the Reserve Bank’s rates stance means for property borrowers
- How investing regularly can propel your returns
- Super sector in ASIC’s sights
- Most Popular Operating Systems 1999 - 2022
- Our investment and economic outlook, July 2024
- Striking a balance in the new financial year
- The five reasons why the $A is likely to rise further - if recession is avoided
- What super fund members should know when comparing returns
- Insurance inside super has tax advantages
- It’s never too early to start talking about aged care with clients
- Capacity doubts now more common
- Most Gold Medals in Summer Olympic Games (1896-2024)
- SMSF assets reach record levels amid share market rally
- Many Australians have a fear of running out
- How to get into the retirement comfort zone
- NALE bill passed by parliament
- Compliance focus impacts wind-ups
- LRBA interest rates increase for 2025
- Income-free areas set to increase from 1 July
- Most Spoken Languages in the World
- Middle-to-higher incomes boosting SMSF growth
- Investment and economic outlook, May 2024
- Transitioning into retirement: What you should know
- Plan now to take advantage of stage 3 tax cuts
- Deeming freeze a win for Age Pensioners
- Downsizer contributions can be time critical
Article archive
- April - June 2024
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
- January - March 2015
- October - December 2014