Life Insurance

Life Insurance provides a lump sum benefit payable upon your death. Most life insurance policies are term life insurance policies as the contract is only renewable for a certain term. Age 65 of the life insured is the most common term.

Beneficiaries of life insurance policies are normally your dependants, estate or Superannuation Fund. Life insurance can be used to pay back debts, future liabilities/expenses and/or provide an income stream. In essence, it helps to keep your family’s financial plans on track and maintain their current lifestyle.

Is life insurance tax deductible?

Life insurance premiums are only tax deductible inside the Superannuation environment. If your Superannuation fund was to receive a life insurance payout, the fund is is not taxed on it. However, depending on who the beneficiaries of your Superannuation fund are, this could attract a ‘death tax’. Only tax dependant beneficiaries will avoid the death tax.

A tax dependant for the purpose of a Superannuation death benefit is:

• a spouse or de facto spouse;
• a former spouse or de facto spouse;
• a child of the deceased under 18 years of age;
• any person who relied on the deceased for financial maintenance at the time of their death; or
• any person who lived with the deceased in a close personal relationship where one or both of them provided financial and domestic support and personal care.

Please note superannuation death benefits can be paid out as either lump sums and/or pensions.

Generally, life insurance premiums should be paid inside the Superannuation environment but there are exceptions to this rule.

Can life insurance policies be moved into superannuation?

If a trustee of a superannuation fund was to accept a transfer of a life insurance policy from a member or relative, the fund would in fact breach the acquisition of asset rules, jeopardising the complying status of the superannuation fund.

However there is a potentially simple solution to this problem.

Where an individual has an existing life insurance policy outside of superannuation and wishes to transfer it a superannuation fund, they can ask the life insurance provider to cancel the existing policy and reissue a new policy in the name of the trustees of the superannuation fund. The cancellation and reissue of the policy means the cover is effectively transferred to the superannuation fund without a breach in the acquisition of asset provisions.

However, careful consideration should be given to ensure the individual does not lose any benefits from the original policy when having the policy reissued in the name of the fund.

In most cases, there is no additional risk for the provider and they may allow the cancellation and reissue without additional underwriting.

Some providers may nevertheless see this as an opportunity to refresh the terms and conditions available on the policy to the policyholder’s detriment.

Practically speaking, only Self Managed Superannuation Funds (SMSFs) and superannuation funds that use your existing life insurance provider will allow such a transfer.

How much life insurance?

Life insurance cover is quite simple to calculate in the sense that once someone dies they no longer have any family contribution nor do they incur living costs. It is important to remember a family contribution does not just have to be monetary - it may be as a carer, cooking, cleaning, looking after the children, etc.

Life Insurance cover should include:

• A repayment or reduction of your debts (credit cards, personal loans, home loans, investment loans etc) - this should include planned house upgrades or renovations.
• Investment capital to provide an income stream for your surviving spouse and/or dependents. The capital required to provide the desired income stream will depend on the how this capital is structured, which determines how income will be taxed. Please refer to the estate planning section for more details.
• Education expenses for your children so they may finish secondary school/university.
• Funeral expenses.
• Payments for outstanding tax liabilities and allow for your estate to be divided equitably without the need to sell assets.
• Capital required for business succession.

The amount of Life Insurance cover required is reduced by:

• The envisaged earning capacity of your remaining spouse (Please remember one’s ability to earn income might be dramatically reduced with an increased family workload). To enable the remaining spouse to maintain earning capacity, help can be hired.
• Possible downsizing of your family and/or holiday home.
• Existing savings including Superannuation and/or investment income.

Estate Planning and Life Insurance

The structure of your estate plan will help determine the correct level of life insurance cover. This is because it determines:

• How much of your estate is transferred to your dependants (after tax considerations)
• Tax on income from your estate.