Following on from my last blog I will go a bit deeper into different ways to fund insurance and Stepped vs. Level premiums.
Life, Total and Permanent Disability (TPD), and Income Protection can be funded from superannuation, personally, or a mix of both. Trauma can no longer be funded from superannuation.
There are benefits to both approaches.
Income Protection is the only insurance that is tax deductible when paid personally. This means if your premium is $1,000, and your individual tax rate is 34.5% (including the 2% Medicare), you would get $345 back when you do your tax return.
All 3 of the insurances are tax deductible inside superannuation, but the superannuation tax rate is 15%. This means, that if your cash flow allows, and you’re earning over $18,201, you’d be better off holding Income Protection in your own name for tax purposes.
Life and TPD are not tax deductible in your own name. The benefit of holding outside of superannuation is the fact that you are the owner of the policy, so when the benefit is paid it goes directly to you, or your estate, rather than superannuation and then to you.
Generally speaking, if you make a Life or TPD claim you will meet the condition of release from superannuation, so the funds can be paid to you, but it does slow down the process.
Trauma cannot be held inside superannuation anymore and isn’t tax deductible.
In regards to Stepped vs. Level premiums, this is how the premiums are treated each year.
Stepped premiums will increase each year, but start off cheaper.
Level premiums start off more expensive, but remain much the same until age 65 (or later for some policies).
Determining which is better can be a hard thing to do, but we have software that will show us the estimated fees until age 65 and we can view if you are better off to hold it as Stepped or Level over the long term. Also depends on what the insurance is for, for example, if you are covering debt it is expected that debt will decrease so you can decrease the coverage as well.
There is another type of insurance premium, which you will see with insurance in some super funds, and it is called Unitised. What this means is the premiums stay roughly the same, but the amount of coverage reduces over time.
If insurance is done right, early, this can save you a huge amount of money over the life of the insurance policy.
Next blog I will go into more detail about the process of getting new insurance.
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