By Nathan Free
Insurance is a key tool in any long term investment strategy but it is often overlooked due to cash flow limitations. Did you know that in most cases you can fully fund your insurance from your super, including from a self-managed super fund (SMSF)? This effectively removes cash flow concerns and also makes paying insurance premiums a lot more tax effective.
Through your super you can fund Life, Disablement and Income Protection insurance premiums. Income Protection premiums are the only type of personal insurance premiums that are tax deductible when not held in super, however when you pay for your insurance from your super you are paying your premiums from pre-tax income, that effectively means that any cover you have in super is tax deductible.
As an example John is on an income of $90,000 per year, John has Life, Disablement and Income Protection insurance with premiums totaling $5,000 per year ($3,000 for the Life and TPD and $2,000 for the Income Protection.)
John can claim a full tax deduction on his Income Protection insurance, so he only needs to earn $2,000 before tax to pay that premium. Because Life and Disablement premiums are not tax deductible John will need to earn $4,918 before tax to take home $3,000 (assuming tax of 37% plus a 2% Medicare levy). Therefore funding $5,000 worth of insurance is going to cost John $6,918.
If John paid his Life and Disablement premiums from his SMSF he could put $3,000 into his super before tax, therefore funding $5,000 worth of insurance is going to cost John $5,000.
Through super Income protection is the most likely insurance to be claimed on, it replaces 75% of your income if you are unable to work due to sickness or injury and keeps paying you until you are able to return to work or until you turn 65, essentially giving you unlimited sick leave.
Income Protection premiums are effectively tax deductible whether paid by super or not, the advantage of paying in super is that it provides greater flexibility in regards to how the insurance is funded, as John can pay from:
* his employer compulsory or voluntary super contributions,
* his existing super balance,
* the income from his investments in the super fund, or
* a combination of the above.
When holding cover through super there are some considerations that need to be made in regards to cover restrictions and potential taxation of benefit payments, however these can typically be overcome with a tailored insurance strategy. Whether holding insurance through super is right for you depends on your circumstances and is something you need to discuss with your financial adviser.
Most advisers will not charge you a service fee to implement insurance, so it makes a lot of sense to take advantage of their expertise when setting up your cover, and more often than not I find that clients are able to get a better deal through a financial adviser than if they go direct to the insurer.
Nathan Free
Financial Adviser
Fortnum Financial Advisers
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