Life Insurance – What Structure Works for Your Family?

[This article is from our partners, Quill Group]

Welcome to the new financial year! 

Over the past six to twelve months we’ve had a number of people enquire about life insurance and how to optimally structure it for their family. 

It should come as no surprise that the best way to structure it will depend on your personal circumstances as there is no “catch-all” that suits everyone.  However, today I am going to try and explain the most common structures when it comes to insurance for families without any jargon.

Term Life Cover (Death)

In the main, this cover is owned by superannuation.  That’s because Term Life Cover inside superannuation can be a tax deductible premium, whereas held in a personal name it is not.  This represents a 15 percent saving on premiums. Because the funds are being used to protect the family, the benefit proceeds can be paid out tax-free if they’re going to a spouse or a financial dependant.

Total Permanent Disability Cover (TPD)

The TPD classification applies when a serious accident or injury results in total and permanent disablement, making it difficult to continue to work and earn an income.

Depending on the policy you accept there is a three-to-six month waiting period.  However, there is a second consideration for TPD and that is the definition of “work” or “occupation”.  The two types of TPD you can apply for:

1. Any Occupation Definition – a benefit will be paid if a person is unable to engage in gainful employment in any occupation for which the member is reasonably qualified by education, training or experience. In practice, the likelihood of an insurance payout under this definition is lower than an ‘own occupation’ definition, but is more compatible with the Superannuation Industry Supervision Act (SIS) permanent incapacity condition of release.
2. Own Occupation Definition  – a benefit will be paid if a person is unable to work again in their own occupation they held just prior to TPD. The probability of an insurance payout under this definition is greater than an ‘any occupation’ definition, but is less compatible with the SIS condition of release.

Now with regards to structuring you will note the comments about the SIS condition of release.  So now we need to look at the ideal structuring options:

Any Occupation Definition – This can be held 100 percent inside superannuation and will receive the same tax concessions which are applicable to the death cover.  Also typically the TPD will be attached to the Death Policy.  Please note, the biggest disadvantage with holding TPD inside superannuation is that a proportion of the benefit can be taxed.  For the purposes of this article I will not dive into the formulas and how this all works because as always, it is never simple!

Own Occupation Definition  – This cover will need to be held outside of superannuation, as from the 1^st July 2014 the government legislated that own occupation policies cannot be held inside super.

So the question is: how do I structure my insurance so I get the best of both worlds?  Well insurers offer Linked Policies!  A linked policy is one where you hold the “Any Occupation” portion of the policy inside super and the “Own Occupation” portion in your personal name.  Hopefully, this diagram will held explain:

The good aspect to the above is there is no doubling up of cover as they are effectively one policy!

Income Protection 

There’s been a lot of media attention on income protection policies over the past 18 months.  It all started with APRA removing all Agreed Value policies from income protection.  Since that day in March 2020 most insurers in the market place embarked on increasing premiums anywhere from 10 percent to 70 percent – and we’re not sure if they are finished increasing prices.  

There are also set to be more changes in October this year.  So it is really important that you understand what you are purchasing and what implications this will have if you were to claim.

Your ownership options:

1. My ideal structure 

Establish the policy in your personal name and pay the premiums with your surplus cashflow.  Why?  Because the majority of the premiums are tax deductible. Though from a cashflow perspective you fund 100 percent of the premium, when you lodge your tax return it will reduce the level of tax payable – or even provide a refund!

2. Own 100% in Superannuation 

You will be able to fund the premiums with superannuation monies to avoid impacting cashflow. 

However, be careful as there are some ancillary benefits that cannot be offered when you purchase these policies inside super.  For instance, Specified Injury Benefit which provides you with a multiple of your monthly benefit for a injury whether you stop work or not.  For example, if an insured individual was to suffer an injury which result them in becoming a paraplegic, they would be guaranteed five years of benefit payments whether they go back to work or not. This is just one example.

3. Linking inside and outside 

Like the TPD “Any and Own” linkage of policies, you can pay for the the majority of an Income Protection premium inside super and then to obtain the ancillary benefits discussed in option 2 sit outside in a policy in your personal name.  The premium outside may be tax deductible, depending on the policy options selected.

Critical Illness (Trauma)

Critical Illness cover will provide a lump sum if you were to suffer a serious Illness such as cancer.  Unfortunately, there is only one option here – that is to pay the premiums with cashflow – and they’re NOT tax deductible. 

Like TPD Own, this cannot legally be held inside superannuation.  You can, however, link all these policies together to help reduce policy fees.  If you do, beware that if you were to claim on your trauma policy, then all the linked covers would reduce by the payment, so if you wish to keep the same level of death cover as your did pre-claim, check the Product Disclosure Statement to see if you need to purchase Buyback Cover, or if it is already included.  

Hopefully, this very brief explanation of structuring life insurance has assisted you in making decisions about the structure of your life insurance policies – but as you can see it is complex.   As I said at the start you may require differing structures because of your circumstances and please remember all insurers can be different to each other.

Thanks and lets hope 2021/2022 is better for everyone!

Disclaimer: this information should not be construed  as personal advice and does not take your personal circumstances into consideration.