Tips and tricks for Structuring your Insurances

When considering personal insurance there are many ownership options and features that can be confusing.  Without professional advice it is relatively easy for tax benefits to be lost, or incorrect structures to be setup that unwittingly disadvantage the policy holder.  Here are some features you may not know that could save you some $$$ and heart ache down the track:
Life Insurance Premiums can be tax deductible to your super fund
If you own a life insurance policy in your own name the premium cost is not tax deductible to yourself.  However if you own that life insurance policy inside your super fund, the premium can be tax deductible at a rate of 15%.  Basically your cost of life insurance is 15% less inside super than out.  However not all super funds pass on these deductions.  Its important to understand who does and who doesn’t.

Taxation of death insurance benefits to beneficiaries inside super
If you have life insurance inside super and you pass away, whether or not the benefit payout is taxed will depend on who the beneficiary is.  If the beneficiary is a dependant the life insurance benefit will not be taxed when it passes to them.
A dependent is defined as:

  • Spouse or former spouse
  • Child under 18
  • Financial dependent
  • Interdependent

If the beneficiary is a non-dependant then the death benefit will be taxed. Policy holders need to be careful with this.  For example, a Father who has a life insurance policy with his son as the beneficiary inside super would be able to pass that benefit on tax free if the son was 18 yrs old and still living at home.  However if the son had turned 21 moved out of home and supported himself, the death benefit would be taxed.

Indemnity or Agreed value for Income Protection?
Agreed value policies will pay you out a fixed agreed amount. This is determined upon application. You could apply to cover 75% of your current salary. An indemnity style policy will look back over the past 2 or so years and pay you the lower of your best rolling average 12 months earnings during that period, or your benefit amount that you applied for.

Indemnity policies cost less than agreed value and can save you money, and may be suitable for you if you are in a profession with a very low likelihood of a drop in income.  For example if you are an established public primary school teacher you may consider an indemnity style policy.  If you were an established recruitment consultant with a large commission component to your earnings you might prefer an agreed value policy to provide security given that your income could be volatile year to year.
If you're planning on taking maternity leave, expect to be between jobs, or are taking a break it may be wise to look at an agreed value cover.

Shop around, transferring an existing insurance policy can be easier than you think
If you’re not sure whether you’re getting the best deal from your insurer but don’t want to go through the hassle of taking out a new policy then you might be in for some luck.  Many insurers will take over an existing insurance policy from another insurer with very minimal paperwork as long as your health has remained good and your current policy isn’t more than 5 years old.  This can all be completed within a few days.  So if you find a cheaper and better policy to your current one, you should examine whether the new company will provide ‘take over terms’ which will mean much less paperwork and waiting time in order to get the new policy approved.

By Myles Thornton