The Government proposed a number of significant changes to superannuation rules in the 2016 Federal Budget, with implications for life insurance held within the superannuation environment. It’s important to be on top of these, since they could have an impact on your retirement planning opportunities.

Many people find it more efficient to fund Life and TPD insurance policies through their super. It can be a tax effective vehicle, both in paying the premiums and for the distribution of policy proceeds to beneficiaries.

In the current superannuation environment a SIS dependant (spouse, de facto, minor dependant children) beneficiary can receive death proceeds from superannuation as an income stream. Tax offsets should apply, and once the beneficiary is over 60, the income stream becomes tax-free. That’s an advantage not available outside the current superannuation regime.

The insurance dilemma

Under the Government’s proposed changes, this tax concession within superannuation will continue. However, a key element for consideration is the $1.6 million pension cap. Insurance proceeds will be incorporated under the cap, with potentially serious consequences for the efficacy of this strategy.

If it’s likely that you will exceed the cap once insurance proceeds are factored in, it’s advisable to seek advice on grossing up your insurance cover to take the extra tax into account.

That’s also true of Total and Permanent Disability (TPD) insurance benefits. Possibly even more so, as we increasingly see the need for higher TPD sums insured to counteract the higher financial costs of a severe disability.

Will insurance through super still be a smart strategy?

The other factors to consider are the proposed $500,000 lifetime cap on non-concessional contributions, and the $25,000 per year cap on concessional contributions. If you hold insurance under super, your premium payments may be assessed as superannuation contributions. As a result, you could exceed one or both of these caps.

If these proposed lower contribution limits are implemented, the insurance premiums could also reduce the amount of funds you can put towards your retirement. Under certain circumstances you may be better off holding your life insurance outside superannuation, so your retirement contributions can be maximised – rather than your insurance premiums further restricting an already-restrictive limitation.

To sum up, superannuation is still generally a very tax effective structure for holding certain types of life insurance policies. To ensure your retirement planning isn’t negatively affected if the Government’s amendments do become law, it’s important to get our advice on the amount and structure of your life insurance.

Please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.