Insurance – protecting yourself against life events
Nobody likes or enjoys paying insurance premiums, but we all accept that there are risks in life with potentially devastating financial consequences. If these risks eventuate, they could lead to lead to financial ruin.
Our health is our most precious yet fragile asset. If you were unable to work due to poor health, everything you have strived so hard to achieve is at risk.
Insurance is the most cost effective way to protect everything you have achieved and what you want for the future.
There are 5 main types of insurance:
Commonly it’s put inside superannuation funds in order to get the tax deduction on the premiums. However there are very specific rules around how it can be paid out of your superannuation fund, so whilst you might qualify for the payment from your insurer, superannuation law might trap the monies within the fund until you retire. Even if your superannuation fund is able to pay it to you, there may be significant tax payable depending on how you take the money. Professional advice is essential before placing TPD inside your superannuation fund, so that you don’t get caught out by either superannuation or taxation issues.
These insurances protect you from having to make drastic financial decisions during periods of high emotional stress, so that everything you’ve worked so hard to achieve is not destroyed.
Insurance is just a risk mitigating strategy
We all need to critically asses our financial situation and understand and explore the risks that could happen, which risks you are comfortable about not insuring and which you are prepared to pay someone else to cover should they eventuate.
When looking at the insurance available, we focus on the most relevant for you and the most tax efficient. Once we have identified the level of insurance cover you need, we look at the most competitively priced and relevant insurance providers to cover your risks in an appropriate way. Our role is to ensure insurance is not only tax effective in the way you pay your premiums, but also in the way in which you will receive the future benefits.
It’s easy for people to ‘over insure’. This is often due to not understanding how different policies interact with each other and what they actually protect. This can lead you to pay for something you don’t need and, if not structured correctly, potentially leave you or your family with a hefty tax bill at the end.
Let me explain – a badly structured policy could have cost David $280,000
Often people under the guidance of an advisor will put their life insurance inside their superannuation fund to take advantage of the tax deduction. Theoretically it’s a tax efficient model; the issue is that people don’t realise that their beneficiaries may not be allowed to receive the money tax free. This can potentially leave them with an expensive tax bill, depending on the structures, which can be up to 31.5% tax on the proceeds.
When Jane wanted to leave $1 million to her son David, she was advised to structure the insurance under her SMSF. The problem was that David, at 21, was considered her dependant under the superannuation law but not her dependant under the tax law. If Jane died and the superannuation payout to David included her insurance proceeds, a large percentage of these proceeds would have been taxed at the 31.5%.
Jane’s $1 million life insurance policy, in a worst case scenario, would have left David with a tax bill of $315,000. We helped Jane to avoid this by taking two very simple steps, including transferring the insurance policy into her name.
Ensuring people are adequately insured is only the first part. More importantly, we see our role as applying our tax knowledge to ensure that whilst a tax deduction is attractive it shouldn’t be sought to the detriment of any possible future tax bill.