Legal Tip 53: Structuring Life Insurance

Structuring Life Insurance


Insurance is a financial product and only licensed financial planners can advise on financial products - such as should I take out insurance, how much should I insure for. But lawyers can advise on the taxation and estate planning aspects.


Most people give little thought to insurance other than knowing they ‘have it’ and that it is ‘in super’. Some know or think that their spouse will get the proceeds after death, others don’t know.


Where the owner of the life insurance policy is a superannuation fund:

• The premiums are tax deductible
  
  
• The proceeds are exempt (or disregarded) to the superfund from CGT, Item 5 of s 118-300 of ITAA 1997 http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.300.html
  
  
• The proceeds will need to be paid out of the superfund
  
  
• There may be tax on the payment of the proceeds depending who receives it.
  

Because payment is made to the fund it is superannuation proceeds. Superannuation proceeds can only be paid to 2 classes of people related to a deceased person:

1. A dependant, or
   
   
2. The legal personal representative (LPR = the estate)
   

If insurance is paid to the deceased’s LPR it will pass in accordance with the will of the deceased, or if there is no valid will it will pass according to the intestacy laws.


Therefore if you want to get your life insurance held inside super to someone who is not a dependant, such as a parent, it must be paid to the estate (LPR) and then it can paid out via the will.


Once the super is passing via a will the terms of the will can mean it will be paid to a superannuation proceeds trust which is a testamentary trust holding just the super proceeds. The terms of this trust can then allow the trustee to invest the proceeds with the income distributed to the beneficiaries who would be dependants for tax purposes.


Minor children, who would be classed as dependants, could take the super directly, with no tax payable. But a large sum of money could end up in their hands. It could be invested by a trustee until they are 18, but once they are 18 they can call on the money and then spend it all. Once invested it could be set up so the children receive the income and are taxed at adult rates, s102AG ITAA1936.


Alternatively it could be made to pass to the estate and then to a super proceeds trust. The beneficiaries of the trust can be restricted to the children who are dependants and the trust would then get the funds tax free. The children can also receive the income taxed at adult rates under s102AG. But you can then restrict the terms of the trust, to control it from the grave, so the children do not take the money directly when they are 18. The trust can be kept going. This will provide ongoing tax savings and also good asset protection from bankruptcy and some asset protection against family law disputes.


Specialised legal advise is needed in this area - and it is a good idea to get financial advice as well. Often life insurance will be the major assets of a person in death so it is very important.

 

Just wondering about life insurance within super. At the moment I have very little super and no life insurance. I've heard super is the cheapest place to buy life insurance, is this true. I'm going to put some money into super for this purpose.

How much do you insure yourselves for? What is it costing you? Who has the best life insurance? What are the advantages/disadvantages of having life insurance in your super?

Thanks Terry for the tips

 

Insurance is a financial product so you will need to find someone licenced to answer some of these questions.

Insurance can be cheaper in super because of the buying power of industry and retail funds. But it can also be cheaper because of tax reasons. If the premium is the same paying it from super means you are paying it with concessionally or non taxed money. Outside of super you would earn your wage, pay tax and then pay the premium.

Who has the 'best' life insurance policy would be like asking which lender has the 'best' loan. It depends...

An advantage of having it in super would be the tax savings, cashflow and asset protection. Outside of super your insurance may cost you more and divert funds away from other investments.

 

All super funds offer super...even SMSFs must consider super. Lower cost funds with large volumes of members generally offer "group" policies which are VERY cheap and often easy to obtain. ie Industry funds. http://www.industrysuper.com

Considering all Australian workers should have super the comment "I have little super" reflects likely misunderstanding that super is bad or that you aren't paying yourself first. Super is savings for retirement. How can that be bad if its well managed ? I would encourage you to find your industry fund or a major fund and call them and speak to one of their in-house advisers on the merits of super.

Life insurance varied based on needs. A young family person with young kids and wife should be thinking what happens If I die ?? My wife would need $ and doesn't want a mortgage etc. So life cover of $500K - $1m + may be needed. Depends on debts, lifestyle etc...Some say to take your income (which wife may lose) and multiply by 20 (5% earning = replaces your income) but that can be a bit over the top. Usually start with paying out all debts and then sufficient to replace your income so she doesn't need to work.

 

What is the best (bang for buck) life insurance policy to get for parents of a small family with assets/loans (the average person) then?

I've heard BTIR Buy Term Invest the Rest and cover yourself until 65 yrs old, if you fall off the perch prior you've covered you partner/heirs

Example Life insurance, Term Life, Life Cover, Life insurance in super, Death Cover | Westpac

 

What you are asking is not legal advice but financial advise. You will have to see a financial planner for that