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Life insurance through superannuation

Learn about the 3-step approach to life insurance through superannuation, including estate planning, affordability, and comparing superannuation versus non-superannuation ownership. Explore topics such as death cover, TPD and trauma cover, accessibility, and grossing-up cover.

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Life insurance through superannuation

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  1. Life insurance through superannuation Wayne Belford ING Australia. www.ing.com.au May 2008

  2. Agenda • The 3 step approach • Cost & affordability

  3. The 3 step approach

  4. The 3 step approach • Make sure estate planning and accessibility needs can be met • Gross-up cover to take into account superannuation exit taxes • Conduct cost comparison of superannuation versus non-superannuation ownership

  5. Estate planning & accessibility • Estate planning treatment and accessibility of benefits will depend on the trigger event and superannuation fund’s trust deed • Death • Permanent incapacity • Terminal illness • Temporary incapacity • Preservation age • Retirement

  6. Death cover • Superannuation fund trustee may pay death benefits to • Qualifying dependants as defined under the SIS Act • Spouse • Child • Financial dependant • Interdependant • Deceased’s estate who can then make payment to • Dependant • Non-dependant

  7. Death cover • Proposed removal of discrimination of same sex couples and their children in areas such as • Superannuation and taxation of death benefits (from 1 July 2008) • Social security (from 1 July 2009) • Medicare and Pharmaceutical Benefits Scheme safety net (from 1 January 2009) • Fringe benefits tax (from 1 April 2009)

  8. Financial dependant? • Adult child who can afford to meet necessary living costs however relied on deceased to fund lifestyle expenses such as annual holiday, luxury motor vehicle etc… • Adult child employed in family business owned by deceased and salary derived is used to fund necessary living costs • Adult child receives family trust distributions to meet necessary living costs from a trust where deceased was trustee

  9. TPD & trauma cover • Permanent incapacity • Member unlikely to engage in gainful employment which they are reasonably qualified by education, training or experience • Possible release issues for certain TPD definitions • Own occupation • Home-maker • Non-working • Consider partial superannuation ownership if appropriate

  10. Accessibility if ‘permanent incapacity’ not met? • Arthur (45) has own-occupation TPDcover in his superannuation fund. He can no longer work as a surgeon but is able to return to general practice • John (57) has own-occupation TPD cover in his superannuation fund and is able to work • Linda (47) has a trauma policy owned by her self-managed superannuation fund If terminally ill

  11. TPD & trauma cover • Preservation age • Permanent retirement • Transition to retirement pension • Age 65 • Terminal illness • Two qualified medical opinions (one must be a specialist) • Member is reasonably expected to pass away due to ill-health in the next 12 months

  12. Salary continuance cover • Temporary incapacity • Salary continuance payments plus leave payments and worker’s compensation etc. must not exceed gain or reward being received before injury or illness • Potential issues for agreed or guaranteed cover • Potential issues if policy has no offset clause for leave or worker’s compensation payments • Other release conditions can be utilised if met

  13. The 3 step approach • Make sure estate planning and accessibility needs can be met • Gross-up cover to take into account superannuation exit taxes • Conduct cost comparison of superannuation versus non-superannuation ownership

  14. Grossing-up cover to allow for exit taxes • Grossing-up sums insured for cover held via superannuation could depend on factors such as • Type of cover • Trigger event • Recipient of payment • Age at time of payment • Mode of payment

  15. Death cover – lump sum • Lump sum payments are tax-free to qualifying dependants as defined under the ITAA Act • Spouse • Ex-spouse • Child under age 18 • Financial dependant • Interdependant • Proposed to include same sex couples and their children from 1 July 2008

  16. Death cover – lump sum • Taxable component of lump sum payments are taxable to non-dependants as defined under the ITAA Act • Taxed element 16.5%* • Untaxed element 31.5%* • Untaxed element is created where premiums are claimed as a tax deduction by the fund’s trustee *The 1.5% Medicare Levy does not apply if payment is made via deceased’s estate

  17. Death cover – lump sum • Service period start date is used to determine taxed and untaxed elements • A superannuation fund’s service period start date is earlier of these dates • Date fund membership is established • Service period start date of a rollover payment made to the fund • Date began work with employer who has made employer contributions to the fund

  18. Case study – William • Assumptions • William’s service period began on his 35th birthday and his last retirement day is his 65th birthday • He passes away on his 53rd birthday Tax free component & taxed element of taxable component 60% completed service 35 65 53 Death Service start Last retirement day

  19. Case study – William • At time of William’s passing he had $50,000 in death cover owned via superannuation • All benefits are to be paid to his daughter Eva (26) who is a non-dependant • How much will Eva receive after-tax?

  20. Case study – William • William’s death cover is held separate to his accumulated superannuation interest • Two lump sum death benefits will be paid $0 $4,950 $6,300 $0 $41,250 $0

  21. Case study – William • If William’s death cover was held as part of his accumulated superannuation interest • One lump sum death benefit will be paid $0 $29,700 $37,800

  22. Case study – William • Eva’s net lump sum summary table $284,300 $266,700

  23. Case study – Tanya • Tanya (49) has $200,000 in accumulated superannuation benefits • $100,000 tax free • $100,000 taxable • She also has $400,000 death cover via superannuation and a 30% completed service • In the event of her death, de facto Joe will receive $400,000 with the remainder going to her non-dependant child

  24. Case study – Tanya • Death cover forms part of accumulated superannuation interest Accumulated superannuation with insurance $600,000 $100,000 tax free $80,000 taxable (taxed) $420,000 taxable (untaxed) Non-dependant child to receive 1/3 ($200,000)

  25. Case study – Tanya • Death cover held separate to accumulated superannuation interest Insurance via superannuation $400,000 $120,000 taxable (taxed) $280,000 taxable (untaxed) Super account $200,000 $100,000 tax free $100,000 taxable (taxed) Non-dependant child to receive this

  26. Case study – Tanya $599,694 $570,142

  27. Death – pensions • Pension payments from a death benefit pension are tax free to a beneficiary • Once beneficiary reaches age 60; or • Pension formed with 100% tax free component; or • Deceased was at least 60 years old at time of death • Superannuation pension tax offset of 15% applies to taxable pension payment

  28. Case study – Jake & Pam • Jake (49) has passed away with accumulated superannuation of $500,000 • $400,000 tax free • $100,000 taxable • Pam (43) is Jake’s spouse and sole beneficiary of his superannuation benefits • $500,000 death cover on Jake’s life is held via superannuation • Pam wishes to receive $500,000 as a lump sum which will largely be used to repay home mortgage

  29. Case study – Jake & Pam • Death cover forms part of accumulated superannuation interest Accumulated superannuation with insurance $1,000,000 $400,000 tax free (40%) $600,000 taxable (60%) Remaining amount used to commence death benefit pension which will be 60% taxable

  30. Case study – Jake & Pam • Death cover held separate to accumulated superannuation interest Super account $500,000 $400,000 tax free $100,000 taxable Insurance via superannuation $500,000 $500,000 taxable Used to commence death benefit pension which will be 20% taxable

  31. TPD & trauma cover • If withdrawals meet terminal illness definition • Lump sum payments will be tax-free • Pension payments could be subject to tax if under age 60

  32. TPD & trauma cover • If withdrawals meet disability superannuation benefit definition, a tax-free invalidity amount is created according to incomplete service • Two qualified medical opinions required to sign-off that any occupation definition is met • Taxable component is taxed if recipient is under age 60 • Low rate cap of $140,000 applies for lump sums received on or after preservation age • Pensions qualify for 15% tax offset

  33. Case study – Lorna • Assumptions • Lorna’s service period began on her 35th birthday and her last retirement day is her 65th birthday • She stops being capable of ever being gainfully employed on her 53rd birthday Tax free invalidity amount 40% incomplete service 35 65 53 TPD Service start Last retirement day

  34. Salary continuance cover • Salary continuance payments are generally taxed at member’s marginal tax rates • Including from age 60

  35. The 3 step approach • Make sure estate planning and accessibility needs can be met • Gross-up cover to take into account superannuation exit taxes • Conduct cost comparison of superannuation versus non-superannuation ownership

  36. Case study – the Martin’s • Tom (43) and Lyn (42) have two children • Jackie (7) and Kylie (5) • Their financial planner has identified a need for $1,500,000 death & TPD cover on Tom’s life • A personally owned income protection policy is also recommended • Tom’s marginal tax rate is 41.5% • His date of birth is 1 July 1964 and the fund’s relevant service period start date is 1 July 2000

  37. Case study – the Martin’s • Superannuation death cover ownership • Required sum insured if lump sum to be paid to qualifying dependants is $1,500,000 • Required sum insured if lump sum to be paid to non-dependants is $2,065,045* • Taxable (taxed) component - $596,628 • Taxable (untaxed) component - $1,495,417 *Assumed date of death is 1 July 2008

  38. Case study – the Martin’s • Superannuation TPD cover ownership • TPD cover of $1,731,000 is required if $1,500,000 net lump sum to be paid* • Tax free component - $656,581 • Taxable component - $1,074,420 *Assumed date of permanent incapacity is 1 July 2018

  39. Case study – the Martin’s • Non-superannuation ownership • Premium - $2,570 pa • Superannuation ownership • Premium - $2,800 pa • Grossed-up TPD cover • If funded with salary sacrifice or personal deductible contributions, after-tax cost is approximately $1,638 • Annual savings - $932 or 36.3%

  40. Case study – Rylie • Rylie (43) is seeking to establish cover via his super fund • Recommended net sums insured are $800,000 death & TPD (own occupation) • Outstanding mortgage - $200,000 • Dependants to receive $700,000 on death • His date of birth is 1 July 1964 and the fund’s relevant service period start date is 1 July 2005 • Personally owned income protection (guaranteed cover) is in place

  41. Case study – Rylie • Rylie’s marginal tax rate is 41.5% and is able to implement a salary sacrifice strategy • What is the best ownership structure for Rylie? • After some investigation, Rylie only requires short-term access to $400,000 on TPD • Outstanding mortgage - $190,000 • Meet living expenses to age 60 - $210,000 plus income protection benefits

  42. Case study – Rylie • Option 1 • Non-super ownership - $800,000 death & TPD • Premium - $1,780 pa • Option 2 • Super ownership - $842,095 death & $452,726 TPD • Non-super ownership - $400,000 TPD • Total premiums - $2,022 pa • After-tax cost - $1,453 (annual savings of $327 or 18.3%)

  43. Case study – Rylie • Option 3 • Super ownership - $842,095 death & $400,000 TPD • TPD not grossed-up as this will be withdrawn tax-free from age 60 • Non-super ownership - $400,000 TPD • Total premiums - $1,968 pa • After-tax cost - $1,422 (annual savings of $358 or 20%)

  44. Case study – Anna • Anna is a single mother with a modest annual income of $35,000 • She personally owns death & TPD cover at an annual cost of $500 • Annual premiums if held via super is $600 • She cannot afford to pay more than $500 • Anna makes a $500 after-tax contribution to her existing OneAnswer Personal Super account • Government co-contribution is $750 • Trustee rebate is $90

  45. Cost & affordability

  46. Life time spend Insurance Source: Business Associates Network, Dr Troughton provides consultancy services to businesses and individuals

  47. Price should not compromise advice • Funding cover via superannuation with pre-tax income or existing superannuation savings • Trauma in self-managed funds • Premium freeze on term life, TPD and trauma • Income protection • Standard protection products up to a 30% saving • Indemnity cover up to a 20% saving • Split waiting and benefit period up to a 30% saving

  48. Other issues

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