4 September 2020
Today, I would like to share a strategy with you that I use for many clients - how to turn a $1 life insurance premium into an after-tax expense of 50 cents.
Now of course, everyone is different, and it goes without saying you should consult a financial adviser for the most appropriate course of action for you; however, this is a strategy I have seen work consistently with people who pay their life insurance premiums monthly. And trust me, there’s a lot of you!
People primarily choose to pay their insurance premiums monthly for cashflow reasons but they are often unaware that most insurer’s charge an additional premium for paying monthly as opposed to annually, usually around 10%.
Additionally, if you own life insurance in your own name, you will be paying the premium with ‘after tax’ money, i.e. money that has already had income tax deducted. Therefore, at its simplest level, to pay a premium of $1 at a 30% tax rate, you would need to make $1.44.
However, a vast majority of Australians own their life insurance through a superannuation fund structure. When employees make contributions to their superannuation (in conjunction with their employer’s contributions) they can claim these as a tax deduction (up to the maximum allowable limit), as can people who are self-employed. For illustrative purposes today let’s assume the tax rate is 30%.
Now, when a superannuation fund pays for life insurance premiums it is usually able to claim this expense as a tax deduction and usually at the rate of 15%. When a ‘standalone’ life insurance policy is owned in a superannuation structure and your insurance premium is deducted annually from your retail (or industry) super fund (known as a Roll Over), the insurer automatically passes on this rebate to you.
So, by paying a $1 life insurance premium annually, as opposed to monthly, you get to save usually around 10%. By having this premium funded by a Roll Over you get the 15% tax rebate automatically passed to you, which brings a $1 life insurance premium down to 76.5 cents.
On top of this, if you are eligible to claim a tax deduction for contributions to superannuation (as I have mentioned above) then by contributing that $1 to your super and claiming this as a tax deduction you are then adding on a further 30% saving, taking the total ‘after tax’ premium down to 49.5 cents.
The ultimate purpose of life insurance is to make sure the right amount of money ends up in the right hands at the right time, when you need it most. So, it’s important to seek professional advice for a strategy that best suits you and your circumstances.
However, for the right person, this strategy can help you understand how insurance protection for you and your family can be structured in the most efficient and affordable way possible. If you’d like to find out more, please speak with your Adviser or get in touch with the Findex Risk Insurance team.