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Insurance within super

Funding premiums inside superannuaiton

Section: 10.7

Deductible superannuation contributions, made by either an employer in respect of an eligible employee (including superannuation guarantee and salary sacrifice arrangements) can be used to fund insurance premiums within super. Alternatively, existing superannuation benefits could be used to fund the life insurance premiums.

The impact of contribution caps, potentially reduced retirement funding and taxation of benefits are important factors to be taken into account when deciding to fund insurance with superannuation contributions or existing benefits.

Funding premiums inside superannuation can be an effective strategy for members with limited disposable income. Premiums are deducted from a member's super account balance. The downfall in this strategy is that the member is reducing their super account balance needed for their retirement. However, for most members this could be the only strategy available where they can obtain insurance cover.

Tax deductions for premiums in superannuation

A member gets the full benefit of the tax deduction and the premiums are funded through deductible superannuation contributions  such as salary sacrifice contributions or personal deductible contributions, the tax deduction for the premiums paid effectively eliminates any contributions tax payable on the contribution. The member has effectively paid the premiums from pre-tax income.

Life insurance premiums

Where the member gets the full benefit of the tax deduction and the premiums are funded via deductible superannuation contributions (including salary sacrifice and personal deductible superannuation contributions) the tax deduction for the premiums paid effectively eliminates any contributions tax payable on the contribution. The member has effectively paid from the premiums from pre-tax income.

Where tax deductible superannuation contributions have not been made to the superannuation fund and the premiums are being funded via after-tax superannuation contributions or existing superannuation benefits, they should contact the superannuation fund to determine whether the member will still get the benefit of the tax deduction. Some superannuation funds may provide a tax credit to the member's superannuation account.

TPD insurance premiums

Note: Prior 1 July 2014, members with TPD insurance such as 'own occupation' had a high risk of insurance claims not being paid out to the member due to the mismatch between insurance policy definition (which determines when insurance proceeds are paid to the fund trustee) and the superannuation definition of permanent incapacity.

However, superannuation changes came into effect on 1 July 2014 meaning that superannuation fund trustees are not able to take out 'own occupation' TPD insurance from this date.

Members with TPD (any occupation) policies that is aligned to the definition of a disability superannuation benefit, then the premiums are 100 per cent deductible to the fund. The table below shows the proportions of insurance premiums for TPD cover that are deductible.

Table1: proportions of insurance premiums for TPD cover that are deductible

TPD cover Proportion
TPD any occupation 100%
TPD any occupation cover with one of the following inclusions;
  • activities of daily living
  • cognitive loss
  • loss of limb
  • domestic (home) duties
100%
TPD own occupation 67%
TPD own occupation cover bundled with one o more of the following inclusions:
  • activities of daily living
  • cognitive loss
  • loss of limb
  • domestic (home) duties
67%
TPD own occupation cover bundled with death (life) cover 80%
TPD own occupation cover bundled with death (life) cover with one or more of the following inclusions:
  • activities of daily living
  • cognitive loss
  • loss of limb
  • domestic (home) duties
80%

Income protection premiums

Income protection owned by a superannuation fund in respect of a member of the fund, the policy premiums are generally tax deductible to the super fund.

Employer superannuation contributions and personal superannuation contributions for which a tax deduction has been claimed are included in the assessable income of the fund and generally taxed at 15%. Where a super fund pays a life insurance premium and claims a tax deduction for the premium paid, the tax on contributions may be removed or reduced depending on how the super fund accounts for the deduction.

Source: ATO

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

Last modified: Friday, September 25, 2020