Our listener question today comes from Collette, who would like to know more about the benefits and limitations of Life and TPD Insurance that is included in some super funds.
This is something of a morbid and awkward topic, but it’s certainly an important one. Most people consider getting Life and TPD Insurance for peace of mind – some of our clients wouldn’t sleep at night without it. Of course, some are on the other end of the scale and don't want to pay any insurance for the ‘what ifs’.
The level of cover someone has really depends on many factors, such as age. It’s worthwhile noting that in the case of death or TPD, you would also receive your super balance, which would be the biggest component of that sum for people over 50. But how much is enough? As a rough guide, you might like to think of it like this – if you had $1.2 million in your retirement savings (including debt) but plan to have $1.6 million to retire, you’d need the insurance to bridge the gap to your desired amount – in this case, $400,000.
A new client of Michael’s was paying $15,000 each year in insurance. It was turning out to be a significant barrier in him achieving his retirement goals, so he stopped paying the insurance, deciding that statistically he had a very low chance of anything happening to him based on his age. But there was a 100% guarantee that he wouldn’t make his retirement goals by paying this insurance going forward. All our clients have individual circumstances, and we can only give specific advice when we know what these are. We can't tell you how much cover to get, or how much you need, but we can go through the various scenarios of what it would look like and how it would affect your savings.
We mentioned age earlier because the needs of someone in their 30s, with a mortgage and three kids, would be a lot different to someone in their 60s. For the young couple with three kids, the insurance cover would be cheaper due to their age, and we would highly recommend this kind of insurance for them. Of course, we don’t have clients under 50 anymore, and it does get a bit trickier the older you get. Essentially, it’s about working out the trade-offs between certainty of cover and desired retirement savings.
A lot of people don’t realise they have cover through their super fund, so we recommend you have a look at this, and to check out the level of cover as it does differ.
A simple example: A $100,000 life insurance policy costs me $1,000 in premiums. If the cover is held in my super fund, the premium tax deductible for the super fund at a rate of 15%, giving you $150 tax rebate off your premium. Then your premium is actually $850, which means it's 15% cheaper. Generally speaking, if something is tax deductible, then the payout is taxable. In this case if the payout is going to a tax dependent beneficiary (which a spouse is considered to be) then it is paid tax-free.
TPD is a little bit more complex. The amount you would receive would be in lieu of your usual income for the rest of your career. If you had $100,000 of TPD insurance through your super, again you would receive a 15% reduction on the premium. If something happened at the age of 50, it would be paid into your super, which you wouldn’t yet have access to. So, if you withdrew it, you would pay tax on the sum. If the payment occurred after you turned 60, it would still be paid into your super, but now you could withdraw from it tax-free.
There is definitely a benefit to getting Life and TPD Insurance through super with the included tax deductions, but to get accurate advice from us we need to look at case-by-case scenarios. There are many variables that affect the strategy you should take, such as age, income, and family status.
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