Secure your family's future

Andrew (36) earns $110,000 a year. His wife, Claire (32), is about to have their first baby and plans to be out of the workforce for at least 12 months.

With a large mortgage and a new baby to look after, Andrew wonders whether Claire could cope financially if anything happened to him and he could no longer work.

They took out some insurance when they got their mortgage and know their super includes some life cover. However, they’ve taken an unstructured approach to their insurance needs over the years.

Without a clear picture of what they’re covered for, they don’t know if they have enough insurance to protect their growing family.

To make sure they’ll be well looked after if anything unexpected happens, they speak with a financial adviser. Their adviser assesses their personal needs to see if they have enough cover, and to make sure it’s structured in the most tax-effective way.

If you want to protect yourself and your family tax-effectively, purchasing insurance through your super fund could have a number of benefits.

Andrew and Claire’s adviser shows them their existing insurance won’t provide for what they need. He also points out they’re not taking full advantage of the tax benefits available in super.

To protect Andrew and Claire’s family for the long term, their adviser suggests purchasing additional life insurance. This would provide a larger lump sum to Claire in the event of Andrew’s death.

He recommends purchasing this insurance through super so they can take advantage of upfront tax concessions (generally not available outside super) and make the insurance more affordable.

Andrew could pay for the insurance premiums with pre-tax dollars by making salary sacrifice contributions to his super fund. This means Andrew and Claire could:

• reduce the cost of their insurance, or
• purchase a higher level of insurance for the same cost.

What’s more, by having life insurance through super, Claire and their baby (his dependants for tax purposes) would receive unlimited tax-free lump sum payments in the event of Andrew’s death¹.

1. Lump sum tax may be payable when a death benefit is received by a non-dependant for tax purposes (eg an adult child). However, to compensate for the potential tax liability you could consider taking out a higher level of insurance. While this will generally increase the premiums, the after-tax cost may still be lower than insuring outside super when you take into account the upfront tax concessions.

Their adviser recommends taking out additional life insurance at a cost of $1,210 pa.

If Andrew purchased the extra insurance outside super, he would pay the annual insurance premium from his after-tax salary. Taking into account his marginal tax rate of 39.5%¹, the pre-tax cost of the policy would be $2,000 (ie $2,000 - 39.5%¹ tax [$790] = $1,210.)

If he instead purchased the insurance through super, he could arrange with his employer to sacrifice $1,210² of his pre-tax salary to pay the insurance premiums. As a result, he’d make a pre-tax saving of $790³ on the first year's premiums.

Value added by strategy in first year = $790

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Claire and Andrew’s adviser also recommends additional insurance for Claire. If anything happened to her, Andrew would need to significantly reduce his working hours and/or hire someone else to look after the baby full-time, while having to repay their mortgage and other debts alone. By taking out insurance, Claire’s medical bills and additional expenses such as childcare would be covered.

When insuring in super, Claire and Andrew could also arrange to have their premiums deducted from their account balances without making contributions to cover the cost. This would allow them to get the insurance they need without reducing their cashflow.

1. Includes a Medicare levy of 1.5%.
2. When making contributions to fund insurance premiums in super, you should take into account the cap on concessional and non-concessional contributions.
3. Given Andrew pays tax at a marginal rate of 39.5%¹ the after-tax saving would be $478.