Personal insurance policies are highly recommended to provide financial protection for individuals, families or businesses in the event that an individual, family member or business owner suffers a serious illness, injury or death.
The most common types of personal insurance policies held by individuals are:
- Life insurance
- TPD insurance (ie Total & Permanent Disability insurance)
- Trauma insurance
- Income protection insurance
One of the most common reasons for an individual to take out ordinary personal Life and/or TPD insurance (ie outside of superannuation) is to provide financial protection for the family against having to meet mortgage repayments and to compensate for the loss of income in the event of death or permanent disability. In this instance the premium will not be tax deductible, however the proceeds will not be subject to income tax.
Where an income protection policy is taken out for personal protection reasons and the premium is paid by an individual the premium will be tax deductible and the proceeds will be subject to income tax.
Today it is common for Life and TPD insurance to be provided by your superannuation fund. It is important to check with your super fund to see what is available.
Super Life & TPD - Advantages:
- There is less impact on an individual’s cash flow if the premiums are deducted from their super savings.
- If the member is entitled to make deductible super contributions, these contributions can be used to pay the insurance premiums. This means the individual is effectively claiming a tax deduction for the cost of their insurance premiums.
Super Life & TPD - Disadvantages:
- The member may only nominate a person who is dependant under the SIS Act 1993 to be the intended recipient of their life insurance proceeds.
- Premiums paid from super will reduce the member’s retirement savings.
Consolidating your superannuation funds can be a good idea; however, one needs to be mindful of the insurance components of your funds. It may not be wise to transfer $5,000 from an account which has $200,000 Life & TPD insurance when you will lose the benefit of the insurance cover when the fund is closed.