There are pro’s and con’s of funding insurance through supperannuation. We look at those affecting the key insurances which make up the core pillars that help protect your wealth management plans.
Life and Total and Permanent Disablement (TPD) Insurance
Funding Life and TPD insurance in super with concessional (before tax) contributions is still tax-effective for most people, given that:
- Tax effective contributions can be made via salary sacrifice or personal deductible contributions where income would otherwise have been taxed at marginal rates, and
- Most retail and other large super funds return the deduction claimed for death and disability premiums to the insured members, which effectively offsets the 15% tax payable on concessional contributions.
Life and TPD insurance inside super also remains attractive for people who earn over $250,000 per annum, despite the additional 15% Division 293 tax that is payable on their concessional contributions. The Division 293 tax, in addition to the 15% contribution tax, is still considerably lower than the marginal tax rate of 47% (including Medicare levy).
Insurance under superannuation is excellent for younger families, where immediate cashflow is important. For clients closer to retirement we tend to adopt a case by case analysis, as it becomes more important to accumulate super benefits.
Income Protection Insurance
However, clients will usually be worse off when holding Income Protection cover inside super due to Division 293 tax. Where an Income Protection insurance is held outside super, a full tax deduction is generally already available at your marginal tax rate of 47% (including Medicare levy).
The table below summarises the effective tax rate payable when holding Life, Total & Permanent Disablement and Income Protection insurance within and outside superannuation.
< $250,000 pa
|Type of Cover||Inside super||Outside super||Inside super||Outside super|
|Life||0%||Marginal tax rate||15%||47%|
|TPD||0%||Marginal tax rate||15%||47%|
Generally speaking, it is better to hold more protection outside super, as the range of benefits and definitions are far superior. We would only recommend Income Protection within super if a client had insufficient personal cashflow to afford the premium.