We’re onto step 3 (of 10 steps) in becoming financially well organised. Step 3 deals with Risk Planning – answering the question: If you were to pass away, would your family’s financial security be assured?
Last week we spoke about general and personal insurance. This week we’ll focus on term life insurance and total & permanent disablement.
Term Life Insurance
A term life insurance policy will provide a lump sum payout if you pass away.
When determining how much insurance you need, you should consider:
- If I were to pass away, what are my financial and lifestyle wishes for my family?
- What amount of debt do I have and would the life insurance be used to clear that debt?
- What other costs do I want to cover: children’s education, annual family holiday, help with domestic duties, child care?
- Do I want my spouse to continue working or have the choice to work?
- What level of income does my family require to live comfortably?
Once you are clear on what you want to happen to ensure your family is financially secure, it’s a matter of working backwards to determine how much insurance you need. There is no simple formula as everyone’s situation is different.
The next question you need to ask yourself is, “Who should own the policy?”
There are generally two options for policy ownership:
- Within superannuation
- Outside superannuation
There are two main benefits of owning the policy within the superannuation environment:
- The premiums are tax deductible; and
- The proceeds from the policy (when they are paid out by the insurance company), will be paid tax free to the superannuation fund when paid to your spouse or financial dependants.
Total & Permanent Disablement
This type of personal insurance covers you if can no longer work and depending on your policy terms, could either be any occupation or your own occupation.
The proceeds are paid out as a lump sum. A review of TPD policy definitions needs to be undertaken to ensure the policy payout definitions match your expectations and circumstances.
For example, if you can no longer work in your chosen career, but can still work in another job, the policy definition may not trigger the payout of the policy.
Therefore some of the issues that need to be considered include:
- What entity to own it in: super or personally?
- How much do I need?
There are some other traps to be careful of with TPD, when the policy is owned within a superannuation fund:
- Assuming that you are insured and can access your superannuation benefits, there may be additional tax payable on any withdrawal from the superannuation fund.
- A fund can only pay benefits to members when certain events occur. When a member is under their preservation age (the age when a person can access their super, which is between 55 and 60, depending on when they were born) the trigger event can be total and permanent disablement. The type of payment from the fund is called an “invalidity payment”. When a fund pays out an invalidity payment a formula is applied based on the age of the person compared to age 65. Depending on the gap, a significant amount of the policy proceeds may be taxable in the hands of the recipient at between 16.5% and 46.5%. Alternatively, if the policy is owned outside of superannuation, the proceeds will be 100% tax free.
For more pointers on Risk Planning, join us next week when we’ll wrap up Risk Planning with Critical Illness Insurance, Income Protection Insurance and Health Insurance.
We can assist you with all aspects of Risk Planning, feel free to call us on 07 3833 3999 for more information.