There are a range of important financial matters that arise at the end of financial year. One area which is often neglected at this time of year is Personal Insurance – Life, TPD, Trauma & Income Protection.
Here are some of the issues you should consider in the lead up to 30 June.
1. Tax effective Income Protection structuring
Income Protection is one of the more well known types of Personal Insurance, providing an ongoing monthly taxable benefit in the event of illness or injury to replace your income and ensure you can continue to meet your living expenses – food on the table, petrol in the car, debt repayments, school fees etc. while ideally avoiding the need to sell down assets to generate cash.
Structuring your Income Protection appropriately can sometimes be overlooked, as many people rely on cover held within their super fund to provide for some of their needs. However, if Income Protection is owned in your own name and the premiums paid from your after-tax cash flow, some or all of these premiums may be deductible in your personal Income Tax Return – potentially at a higher deduction rate than if owned solely through super.
That’s because Income Protection premiums are tax deductible to the super fund owner at the super tax rate of 15%. Meanwhile, personally owned premiums can be deductible at your marginal tax rate, which depending on your tax bracket could be as much as 47.5% including Medicare levy.
2. Tax effective structuring of Life & TPD cover
Life & TPD insurance can also be structured tax effectively depending on your situation. Life insurance provides a lump sum to your beneficiaries if you pass away, or to you if you are diagnosed with a terminal illness. Total & Permanent Disability provides you with a benefit if you suffer an illness or injury which prevents you from ever working again.
When owned within superannuation, both types of cover are generally tax deductible to the Fund – while personally owned and paid cover generally isn’t. On an ‘after-tax’ basis this can result in a 15% net saving on premiums – however there are other issues to consider when making this decision, particularly who will be your beneficiary, and its important to seek financial advice on this matter before making any changes.
3. Timing of insurance premiums from super and claiming a deduction for Personal Super Contributions
An often misunderstood issue affecting insurance cover held within superannuation where a client is making personal super contributions they later intend to claim as a tax deduction is the timing of contributions, claiming the deduction, and completing a partial rollover of super to pay premiums.
It is important to get the timing right. When a partial rollover of super is made to pay Life, TPD or Income Protection premiums, a portion of the amount contributed during the financial year is included in that rollover. If the deduction for that contribution has not been notified to the sending super fund, then an “undeducted” amount is transferred, and this cannot later form part of the amount notified for the deduction.
Ensure you follow the rule of thumb;
- Make the contribution;
- Lodge the S290 notification;
- Partial rollover for insurance premiums.
- Industry Fund Cover Renewal
If you’re like the majority of Australians, some or all of your insurance cover is held through an industry superfund. Most industry funds’ insurance policies are due to renew on 1 July, and the majority of companies are adjusting their premiums again. Once upon a time, the default cover in an industry fund was the ‘cheap and cheerful’ option for most people and provided useful automatic acceptance cover that allowed people to obtain cover where they may not be able to otherwise due to poor health. However, these policies have suffered from poor claims experiences and the insurers have been forced to pass these costs on in the form of higher premiums to members.
It can often pay to review your insurance ahead of the 1 July renewal to ensure you have cost-effective, appropriate cover in place to ensure your cover is right for you.
This article was first published in Personal Wealth Adviser – Issue 2.