Chapter 1. Pay your life insurance premiums out of your superannuation.
About 2 years ago the government abolished Reasonable Benefit Limits (RBL’s). Until then, the amount of money a person had in superannuation was limited to about $1.3ml before being the funds were severely taxed. This meant that the amount of life insurance a person held in superannuation was limited before paying penalty tax on the benefits.
Since the abolishment of RBL’s a person may hold all their personal life insurance policies within their superannuation fund.
The advantages of this are:
a. The super fund can claim a tax deduction for the insurance premiums, thereby reducing the amount of tax payable by the super fund on earnings;
b. The insured person may be eligible for a tax deduction for the premium in the following cases:
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I. Self employed – as a tax deductible superannuation contribution; or
II. Employed – as a salary sacrifice superannuation contribution.
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c. If part time employed or unemployed (subject to income limits) the insured may be eligible for a government co-contribution of 150% of the insurance premium; or the spouse may be eligible for a rebate of tax equal to 17% of the premium (see #4 below).
An example of the tax savings of making life insurance premiums tax deductible using this strategy is as follows:
Daniel earns $100,000 per annum. He has $1,000,000 life insurance which costs him $1,000 per annum. If he pays for the insurance with after tax dollars, he needs to earn $1,709, pay $709 tax and the balance of $1,000 for his insurance.
The alternative is to structure the life insurance through superannuation, make a tax deductible superannuation contribution of $1,000 and save $709 tax.
The disadvantages include:
The tax payable on benefits paid to a “non tax dependant”. Benefits paid to “tax dependants” are paid tax free. Included in the definition of “tax dependant” is spouse, children under 18 years old, or financially dependant children over 18 years old. |
