Tax benefits with insurance
Building a financial plan without adequate insurance is like building a house on flimsy foundations. Comprehensive insurance cover can be a significant expense. However, the out of pocket cost of insurance can be reduced by taking advantage of the tax deductions that apply to specific types of insurance, and to some methods of implementing insurance.
Income protection
Premiums for income protection insurance can be quite high. This reflects the high frequency of claims. However, premiums are tax-deductible, so the cost is discounted at the same rate as the policy holder’s marginal tax rate. For example, someone on a marginal tax rate of 41.5% (including Medicare levy), paying a premium of $1,000 would have an out of pocket cost of just $585, after the tax deduction is claimed.
It needs to be remembered, however, that any benefits paid under an income protection policy are treated as assessable income, and therefore subject to tax.
Life insurance
While the premiums for life insurance are not normally tax deductible to individuals, there is a simple way to gain a tax benefit. Superannuation funds can claim a tax deduction for the life insurance premiums they pay. So by taking out life insurance via a superannuation fund, the end result is the same as if the premium was deductible to the person taking the insurance.
Using superannuation to provide life insurance has another potential benefit. As premiums are paid by the fund, it reduces the pressure on household cash flow. This may reduce the ultimate superannuation payout, but if the savings made outside of superannuation are used wisely, the overall financial position should be improved.
The proceeds of life insurance are not generally taxable. However, a death benefit paid from a super fund to a non-dependant may be subject to some tax.
Total and permanent disability insurance
Total and permanent disability insurance is usually attached to life insurance. From a tax perspective it’s treated in a similar way, so implementing it via superannuation is usually the most tax-effective way to do it.
Trauma insurance
Trauma insurance pays a lump sum if the policy holder suffers a defined medical condition or injury. It cannot be implemented through superannuation. Premiums are not tax deductible, and benefit payments are not subject to tax.
As with many aspects of financial planning, insurance can be quite complex. It’s worth talking to an experienced adviser who can help you decide upon the appropriate level of cover, and the most tax-effective way to implement it. Talk to your financial planner, or if required, we can introduce you several advisers we recomend.
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