Taxation implications of insurance cover held inside and outside of superannuation
22 May 2020
The tax deductibility of insurance premiums and taxation of benefit payments generally differs depending on whether the policy is held within a superannuation account or as a stand-alone non-superannuation policy.
Holding cover through superannuation can hold some additional risks. For example, if you hold income protection cover solely through superannuation, you must be gainfully employed at the time of pre-disablement. So, if you were to take a two-week holiday between jobs and injure yourself or become unwell, you would technically not meet the condition of gainfully employed.
Additionally, cover held through your superannuation fund needs to meet the SIS Act 1993 “Conditions of release” to ensure a benefit is paid.
When deciding how to structure your policies, it’s important to take a few different factors into consideration such as:
Cashflow.
The long-term impact to your superannuation and whether it will affect your retirement goals.
Beneficiaries on the Life Insurance Component – are they a financial dependant? (i.e. a spouse or any children under 18).
The purpose of the cover.
We have summarised the key differences of each insurance both from a taxation and superannuation point of view. The below examples are based on a benefit being paid as a lump sum rather than an income stream. Rates are inclusive of the 2 percent Medicare levy.
1. Life insurance
Life insurance inside superannuation
Premium deductibility
Deductible to the fund only (not to the individual). However, if additional contributions are made to cover insurance and such contributions are usually eligible for a tax deduction, then the additional premium may be deductible.
Benefit taxed
Generally tax-free if paid to a tax dependant (e.g. spouse, child under 18). Death benefits paid from super to non-tax dependants (e.g. adult children) are generally taxed at 17 percent on the ‘taxable component – element taxed’ and 32 percent on the ‘taxable component – element untaxed’.
Life insurance outside superannuation
Premium deductibility
No tax deduction allowed.
Benefit taxed
No tax on benefit payment unless the policy was taken out for key person insurance.
2. Total and Permanent Disability insurance (TPD)
TPD inside superannuation
Premium deductibility
Deductible to the fund only (not to the individual). However, if additional contributions are made to cover insurance and such contributions are usually eligible for a tax deduction then the additional premium may be deductible.
Benefit taxed
Subject to Employment Termination Payments (ETP) tax rates (i.e. a portion of the payment will be post-June 1994 invalidity, which is tax-free).
The taxable component (element taxed) of disability benefits paid from super is taxed at:
22 percent for members under preservation age.
17 percent for members aged preservation age to age 59 (inclusive).
0 percent for members aged 60 and over.
Members between preservation age and age 59 may be eligible for the low rate cap (i.e. the amount of benefit taxed at 0 percent).
Any taxable component (element untaxed), will be taxed slightly different to the above.
TPD outside superannuation
Premium deductibility
Generally, no tax deduction allowed unless taken out for key person insurance.
Benefit taxed
No tax on benefit payment unless the policy was taken out for key person insurance.
3. Trauma insurance
Trauma inside superannuation
Premium deductibility
This cover is generally not available in superannuation.
Benefit taxed
N/A
Trauma outside superannuation
Premium deductibility
Generally, no tax deduction allowed unless taken out for key person insurance.
Benefit taxed
No tax on benefit payment unless the policy was taken out for key person insurance.
4. Income protection insurance
Income protection inside superannuation
Premium deductibility
Deductible to the fund only (not to the individual).
Benefit taxed
Benefit payments taxed at pay as you go (PAYG) rates.
Income protection outside superannuation
Premium deductibility
Tax-deductible.
Benefit taxed
Taxed at PAYG rates.
It’s important to ensure you and your loved ones have the right amount of insurance cover to meet your needs when you need it most. So, if you require any further information or advice on personal insurance benefit payments, please get in contact with your Adviser.
Important Information :
The information contained is of a general nature only and does not take into account your objectives, financial situation or needs. You should consider whether the information is suitable for you and your personal circumstances. Before you make any decisions in relation to a financial product, you should obtain and read the relevant Product Disclosure Statement or information statement. You should seek personal financial advice before acting on any material.
This content is also not intended to constitute legal or taxation advice as it is of a general nature only. If you require financial, legal or taxation advice, we recommend you speak to a qualified adviser.
Findex Advice Services Pty Ltd ABN 88 090 684 521 AFSL No. 243253