A simple look at protecting your super
Insurance forms the backbone of any successful financial or estate planning strategy. In fact, most of us insure for the possibility of an accident with our car, our house and even our overseas trip – but often don’t think about insuring something guaranteed to occur: our death.
Insuring for your death makes sense, because it is inevitable, it is unavoidable, it is a cold, hard fact rather a gamble. What you do have the option to do is to set your finances up in the right way today so that you can protect those you care about tomorrow.
If you want to protect your family’s ability to earn an income after that moment you stop living, we are here to advise you on the optimum course of action. Get in touch with Stantins on (03) 9818 6000 or email info@stantins.com.au.
Topics:
- How can we help?
- Life insurance and death taxes
- Example 1 – without an insurance policy in place
- Example 2 – with an insurance policy in place
- Example 3 – with future services period deduction in place
Stantins is here to talk through and arrange a number of protection options, including:
- Helping to pay expenses such as medical and funeral costs, and to repay any outstanding debts;
- Providing for dependent children, including covering educational expenses and passing on the family home free of any mortgages;
- Offering ready cash to finance a transaction between business owners or partners;
- Arranging the receipt of a death benefit from a self-managed superannuation find to a non-dependent beneficiary.
Life insurance and death taxes
Australia does not currently require the payment of death taxes or death duties on a deceased person’s assets; however tax is required to be paid on superannuation benefits proceeds paid to non-dependent family members after the death of a member of a superannuation fund.
This taxation liability can be reduced either by through a future service period deduction (outlined later), or through a life insurance policy as shown in the following examples.
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Example 1 – without an insurance policy in place
Mr Jones was born on 1st May 1960 and died on 1st April 2009. His service period commenced 1st January 1981. His Binding Death Benefit Nomination form indicates that 100% of his members balance is to be paid to his adult son. An adult child, whilst being a superannuation death benefit dependant, is not a “tax dependent”, and as such will incur tax on the receipt of the death benefit.
Just before his death, his member’s balance was $300,000, consisting $100,000 tax-free member contributions and $200,000 taxable component. The member’s balance of $300,000 was paid to his son as a death benefit.
His son has the following tax liability upon receipt of the death benefit
- $100,000 tax-free
- $200,000 x 16.5% = $33,000
This leaves a net benefit in the hands of his adult son of $267,000, being $300,000 less $33,000 tax liability.
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Example 2 – with an insurance policy in place
Mr Black was born on 1st May 1960 and died on 1st April 2009. His service period commenced 1st January 1981. His Binding Death Benefit Nomination form indicates that 100% of his members balance is to be paid to his adult son. Again, this will incur tax on the receipt of the death benefit.
Just before his death, his member’s balance was $300,000, consisting $100,000 tax-free member contributions and $200,000 taxable component.
The fund maintained an insurance policy and claimed deductions for premiums paid under the policy. Upon his death, the insurer paid out $50,000 to the fund which forms part of his member account. This increases his members balance to $350,000, which was paid to his son as a death benefit.
His son has the following tax liability upon receipt of the death benefit:
- $100,000 tax-free
- $200,000 x 16.5% = $33,000
- $50,000 x 31.5% = $15,750
Total tax liability $48,750
This leaves a net benefit in the hands of his adult son of $301,250, being $350,000 minus $48,750 tax liability.
The use of the insurance proceeds has offset the total tax liability for the adult child, and ensures that the full value of the members benefit is received to the beneficiary.
Future service period deduction
An alternative to claiming a deduction for the actual insurance premium paid is to claim a deduction when a death benefit is paid out to the beneficiary. This is known as the “Future Service Period” deduction.
This particular tax deduction is very beneficial as it can provide a superannuation fund with a substantial deduction against future tax liabilities, as shown in the following example:
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Example 3 – with future services period deduction in place
Mr Jones was born on 1st May 1960 and died on 1st April 2009. His service period commenced 1st January 1981. His Binding Death Benefit Nomination form indicates that 100% of his members balance is to be paid to his wife. His superannuation is held within a self managed superannuation fund that has been maintaining an investment reserve for some years.
Just before his death, his members balance was $300,000, consisting $100,000 tax-free member contributions and $200,000 taxable component. The fund maintained an insurance policy and claimed deductions for premiums paid under the policy. For the year ended 30th June 2009, the premiums paid were $4,000. Upon his death, the insurer paid out $300,000 to the fund which forms part of his member account. This increases his members balance to $600,000.
For the financial year ended 30th June 2009, the fund can choose to claim either of the following as a deduction:
- Insurance premiums of $4,000;
- Future Service Period deduction of $217,676.
In this case, the trustees choose to claim the Future Service Period deduction of $217,676.
The above examples highlight the importance of understanding the role of both insurance within superannuation, and the financial impact that a future service period deduction can make to eligible members.
To deliver full financial benefits, members and trustees need to have a clear understanding of this and how it could impact on the fund. To see if your financial situation could benefits from one of these options, speak to one of our experts on (03) 9818 6000 or email info@stantins.com.au for a more personal explanation.
