Life Insurance

Life Insurance

LIFE INSURANCE IS DESIGNED TO PAY A LUMP SUM TO THE POLICY OWNER IF AN INSURED PASSES AWAY.

Its purpose is to protect the policy owner’s family or estate in case of premature death and an interruption to the insured’s ability to generate further income wealth. Though people commonly think that life cover insurance is only for the main income earner, we must not overlook the financial significance of those that may simply be caring for children and attending to the myriad of responsibilities at home.

BENEFITS OF LIFE INSURANCE

Provides a cash lump sum that can be used by your family to:

  • Cover costs such as funeral expenses and legal fees associated with the administration of the insured’s Will.
  • Repay debts such as home mortgage and other loans.
  • Replace income loss because of the insured’s death by investing the lump-sum proceeds to create an income stream.

TYPES OF LIFE INSURANCE

Can be purchased inside or outside superannuation:

  • Most superannuation funds provide a life insurance option. Your employer has an obligation to offer you a superannuation fund that provides a minimum level of death cover. You can choose to retain this cover, apply to increase it or opt out of taking up insurance benefits.
  • Premiums may be deducted from your superannuation fund account balance or you can contribute extra funds to meet the cost of the insurance.

TAX TREATMENT & LIFE INSURANCE CLAIMS

Outside Superannuation

  • Premium Deductibility – Life insurance premiums are generally not tax deductible.
  • Taxation on Benefit Payment– Payments are tax free to the policy owner.

Inside Superannuation

  • Premium Deductibility – Life insurance premiums are tax deductible to the superannuation fund.
  • Taxation on Benefit Payment– Payments to financial dependants are not subject to tax. Payments to non-financial dependants are subject to superannuation benefits tax at either 15% or 30% (the tax rate depends on other factors).

HOW MUCH LIFE COVER SHOULD I HAVE?

This will depend on the expenses you need to cover such as:

  • Funeral and other one-off costs;
  • Ongoing living expenses for your family;
  • Loans that should ideally be repaid to assist cash flow;
  • Current or future education expenses for your beneficiaries.

Whether any assets can be sold to pay for something else. Whether downsizing the family home or taking children out of private schooling is an option to reduce living costs or generate extra income.

You should also consider:

  • Whether your spouse will continue with or take up paid work.
  • Funding the cost of a housekeeper, childcare and/or a nanny in case a surviving spouse needs to return to paid work.