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Insurance in Your SMSF May Save You Tax


Having your life insurance owned inside your SMSF means you can use your Super Guarantee and salary sacrifice contributions, or the fund’s existing cash balance, to pay for insurance premiums in a more tax effective way.

This means you can be paying for insurance with your pre-tax dollars in super which could be taxed at as little as 15%, rather than your post-tax dollars which is taxed at your marginal tax rate.

This may lead to significant tax savings on life insurance premiums compared to insurance held outside superannuation, paid with after-tax earnings.

 
 
Let's look at an example:

  • John will turn 45 on his next birthday.
  • And earns $85,000 per annum.
  • He’s looking to take out $1 million of life insurance and hold his policy until he retires at age 65.
  • The premium for John’s life insurance policy is $1,195 in year one.
Earnings $
Earnings required to pay for this in superannuation $1,406
SMSF Contributions Tax Rate 15%
Total Tax Paid -$210.89
Left with after Tax Amount of $1,195
Earnings $
Earnings required to pay for this outside superannuation $1,959
Personal Marginal Tax Rate 37%
Medicare Levy 2%
Total Tax Paid -$764.04
Left with after Tax Amount of $1,195

 
 
John can benefit from:

  • Paying for the premium through superannuation will save John $553 in year one, and $46,514.74 by the time he retires at age 65.
  • Paying for premiums using pre-tax dollars means it will be taxed at 15% - not your marginal tax rate which may be higher.
  • John’s cash flow saving can now be used towards his mortgage, to pay for school fees, or other investments.

The SIS Act requires SMSF trustees to consider the insurance needs of their members, and with the right strategy, insurance can be more affordable than you think.

 
 
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Disclaimer:

AIA Australia Limited (ABN 79 004 837 861 AFSL 230043). Copyright July 2014.

The case study is an example only and does not refer to any real individuals. Outcomes mentioned are not guaranteed. It covers a consecutive period of 20 years from John’s current age of 45. It does not take inflation into account and assumes that John’s income, marginal tax rate, cover and premium levels will remain constant until age 65. It assumes that John is and will continue to be eligible to make taxable superannuation contributions at 15% and that no further taxes, levies or fees are applicable. It assumes that applicable laws (including superannuation and taxation laws) and John’s relevant circumstances remain unchanged until age 65. Viewers should note that changes in individual circumstances (including income), applicable law and product changes (including changes in premium levels and variations in the cover level) may impact the outcome of such a scenario.

This provides general information only, without taking into account your personal circumstances. You should consider the Product Disclosure Statement, available here, in deciding whether to acquire or continue to hold a financial product.