Life insurance and taxes may not be the most thrilling topics, but they're both huge parts of building and protecting wealth. If you're reading this, you likely want to ensure your loved ones are protected, and grasping the tax aspects of life insurance can save you future headaches.
The intersection of life insurance and taxes can be quite a puzzle to unravel. As financial advisors specialising in accounting and wealth management , we're here to help guide professionals and entrepreneurs in crafting effective tax strategies. Let's dig into the details
Life Insurance Inside or Outside Super: Making the Choice
Within your super fund, certain coverage like death, Total and Permanent Disability (TPD) , and income protection can be held. However, there's a limitation – trauma cover and certain advanced features don't fall within the super domain.
Opting for insurance within or outside your super fund has its pros and cons. While there are tax and cash flow benefits with super-held coverage, bear in mind the tax implications when it's time to claim. This largely hinges on the recipient of the benefits.
Exploring Life Insurance Outside Your Super Fund
Venturing beyond your superannuation account opens up more flexibility. Need trauma coverage for events like heart attacks or strokes? It's available. Seeking business expense protection or the "own occupation" TPD definition? You're in luck.
Remember, premiums for death cover , TPD and trauma insurance aren't eligible for tax deductions outside super. But, most income protection and business expenses insurances come with deductible premiums.
On the claim side, claims from life cover, TPD, and trauma policies remain tax-free. If you're claiming income protection or business expense benefits, they fall under the taxable income category and must be reported to the ATO.
Benefits of Life Insurance Inside Your Super Fund
Holding life insurance within your super fund offers distinct tax advantages. Self-employed individuals, for instance, can claim tax deductions on super contributions made for premiums.
Even if you can't claim a tax deduction, there's still good news. Some risk-only super funds extend tax benefits as a rebate on rollovers for premiums. This translates to cost savings.
Super's advantage lies in its positive impact on cash flow, particularly for employed professionals with substantial premiums. Leveraging your super balances instead of personal funds can be a smart move.
Remember, though, that risk premiums chip away at your super savings, and contributions count toward contribution caps. Individual circumstances dictate the most suitable strategy.
Smart Insurance Moves with a Self-Managed Super Fund
For those managing their own super fund , you'll be pleased to know that tax-deductible life insurance premiums for members are usually on the table. It's a win-win situation.
Navigating Taxation on Life Claims via Super
Now, let's talk about life claims through super. Death benefits to dependents are typically tax-free – simple enough. Non-dependent beneficiaries might encounter taxation on a portion of their benefits, with rates at either 15% or 30%, depending on the circumstances.
For TPD lump sum benefits, part of the sum enjoys tax exemption, while the rest is subject to varying tax rates depending on the member's age. Clever strategies, like opting for benefits as an income stream, boosting the tax-free portion, and managing taxable components, can yield favourable outcomes.
Tax and Life Insurance In a Nutshell: Complexity Presents Opportunity
Tackling the intricacies of life insurance taxation might feel like a roller coaster. Nevertheless, these complexities offer opportunities, especially for those with astute financial insight and substantial earnings. Collaborating with a knowledgeable financial advisor can help navigate this maze, ensuring your chosen path aligns with your coverage, tax, and cash flow needs .
Our advisors can help you find the right balance between safeguarding your loved ones and maintaining a sound financial footing. Get in touch to book a life insurance consultation.
Disclaimer: The information in this document is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. This information has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information before acting or seek advice before making any financial decisions.
