SMSF Newsletter #10: Insurance Policy

July 20, 2023


You have been going through some life events and are in the thick of sorting out your affairs and finances. One of the financial decisions is to put in place a life insurance policy so that in the event of your death, your immediate family is looked after for the designated insurance payout.


Is it more advantageous to hold your insurance policy inside or outside the superannuation account?


The answer is it depends on number of factors. One of the most important factors is estate planning, if you think your estate is open to challenge then it is generally advisable to have insurance policy held under personal name so that in the event of your death it goes directly to the nominated beneficiary bypassing superannuation and potentially legal personal presentative. If you structured it this way, the taxation of insurance proceeds would never be a problem.


You get a tax savings of 15% by having life insurance policy to be held by your superannuation vs the non-tax deductibility if held personally. If held outside superannuation you are effectively funding the life policy premium from your after-tax income. Mathematically speaking, you yield the biggest tax benefits by holding the life policy inside superannuation if your personal income tax bracket is between $180,000 and $250,000 per annum.


If held within superannuation, in the event of claim you are forced pay out as superannuation’s death benefit or pension. There will be “hidden death” taxes of up to 30% plus Medicare Levy if the payout goes to someone who is a non-death benefits dependent (s 302-195 ITAA 1997). The most common ones are your non-dependent children who are 18 years of age or older.

Accordingly, if the fund has ever claimed a deduction for insurance premiums for a particular member at any time and that member’s superannuation benefit is paid out to a non-death benefits dependant on their death (s 302-145 ITAA 1997), the superannuation will forever be tainted.


GW Capital Group Pty Ltd General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

By Admin

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