Life insurance through superannuation May 2008 Wayne Belford

Life insurance through superannuation May 2008 • Wayne Belford • ING Australia. • www. ing. com. au

Agenda • The 3 step approach • Cost & affordability 2

The 3 step approach 3

The 3 step approach 1. Make sure estate planning and accessibility needs can be met 2. Gross-up cover to take into account superannuation exit taxes 3. Conduct cost comparison of superannuation versus non-superannuation ownership 4

Estate planning & accessibility • Estate planning treatment and accessibility of benefits will depend on the trigger event and superannuation fund’s trust deed • Death • Permanent incapacity • Terminal illness • Temporary incapacity • Preservation age • Retirement 5

Death cover • Superannuation fund trustee may pay death benefits to • Qualifying dependants as defined under the SIS Act • Spouse • Child • Financial dependant • Interdependant • Deceased’s estate who can then make payment to • Dependant • Non-dependant 6

Death cover • Proposed removal of discrimination of same sex couples and their children in areas such as • Superannuation and taxation of death benefits (from 1 July 2008) • Social security (from 1 July 2009) • Medicare and Pharmaceutical Benefits Scheme safety net (from 1 January 2009) • Fringe benefits tax (from 1 April 2009) 7

Financial dependant? • Adult child who can afford to meet necessary living costs however relied on deceased to fund lifestyle expenses such as annual holiday, luxury motor vehicle etc… X • Adult child employed in family business owned by deceased and salary derived is used to fund necessary living costs X • Adult child receives family trust distributions to meet necessary living costs from a trust where deceased was trustee X 8

TPD & trauma cover • Permanent incapacity • Member unlikely to engage in gainful employment which they are reasonably qualified by education, training or experience • Possible release issues for certain TPD definitions • Own occupation • Home-maker • Non-working • Consider partial superannuation ownership if appropriate 9

Accessibility if ‘permanent incapacity’ not met? • Arthur (45) has own-occupation TPD cover in his superannuation fund. He can no longer work as a surgeon but is able to return to general practice X • John (57) has own-occupation TPD cover in his superannuation fund and is able to work ü • Linda (47) has a trauma policy owned by her self-managed superannuation fund 10 If terminally ill

TPD & trauma cover • Preservation age • Permanent retirement • Transition to retirement pension • Age 65 • Terminal illness • Two qualified medical opinions (one must be a specialist) • Member is reasonably expected to pass away due to ill-health in the next 12 months 11

Salary continuance cover • Temporary incapacity • Salary continuance payments plus leave payments and worker’s compensation etc. must not exceed gain or reward being received before injury or illness • Potential issues for agreed or guaranteed cover • Potential issues if policy has no offset clause for leave or worker’s compensation payments • Other release conditions can be utilised if met 12

The 3 step approach 1. Make sure estate planning and accessibility needs can be met 2. Gross-up cover to take into account superannuation exit taxes 3. Conduct cost comparison of superannuation versus non-superannuation ownership 13

Grossing-up cover to allow for exit taxes • Grossing-up sums insured for cover held via superannuation could depend on factors such as • Type of cover • Trigger event • Recipient of payment • Age at time of payment • Mode of payment 14

Death cover – lump sum • Lump sum payments are tax-free to qualifying dependants as defined under the ITAA Act • Spouse • Ex-spouse • Child under age 18 • Financial dependant • Interdependant • Proposed to include same sex couples and their children from 1 July 2008 15

Death cover – lump sum • Taxable component of lump sum payments are taxable to non-dependants as defined under the ITAA Act • Taxed element 16. 5%* • Untaxed element 31. 5%* • Untaxed element is created where premiums are claimed as a tax deduction by the fund’s trustee * The 1. 5% Medicare Levy does not apply if payment is made via deceased’s estate 16

Death cover – lump sum • Service period start date is used to determine taxed and untaxed elements • A superannuation fund’s service period start date is earlier of these dates • Date fund membership is established • Service period start date of a rollover payment made to the fund • Date began work with employer who has made employer contributions to the fund 17

Case study – William Tax free component & taxed element of taxable component 60% completed service 35 53 Death Service start 65 Last retirement day • Assumptions • William’s service period began on his 35 th birthday and his last retirement day is his 65 th birthday • He passes away on his 53 rd birthday 18

Case study – William Tax components Accumulated super Tax free $0 Taxable (taxed element) $250, 000 Taxable $0 (untaxed element) • At time of William’s passing he had $50, 000 in death cover owned via superannuation • All benefits are to be paid to his daughter Eva (26) who is a non-dependant • How much will Eva receive after-tax? 19

Case study – William • William’s death cover is held separate to his accumulated superannuation interest • Two lump sum death benefits will be paid Tax components Insurance Lump sum tax Accumulated superannuation Lump sum tax Tax free $0 $0 Taxable (taxed element) $30, 000 $4, 950 $250, 000 $41, 250 Taxable $20, 000 $6, 300 $0 $0 (untaxed element) 20

Case study – William • If William’s death cover was held as part of his accumulated superannuation interest • One lump sum death benefit will be paid Tax components Accumulated superannuation with insurance Lump sum tax Tax free $0 $0 Taxable (taxed element) $180, 000 $29, 700 Taxable $120, 000 $37, 800 (untaxed element) 21

Case study – William • Eva’s net lump summary table Insurance held No anti-detriment Anti-detriment Separate super interest $247, 500 $284, 300 With accumulated super $232, 500 $266, 700 22

Case study – Tanya • Tanya (49) has $200, 000 in accumulated superannuation benefits • $100, 000 tax free • $100, 000 taxable • She also has $400, 000 death cover via superannuation and a 30% completed service • In the event of her death, de facto Joe will receive $400, 000 with the remainder going to her non-dependant child 23

Case study – Tanya • Death cover forms part of accumulated superannuation interest Accumulated superannuation with insurance Non-dependant child to receive 1/3 ($200, 000) $600, 000 $100, 000 tax free $80, 000 taxable (taxed) $420, 000 taxable (untaxed) 24

Case study – Tanya • Death cover held separate to accumulated superannuation interest Super account Insurance via superannuation $200, 000 $100, 000 tax free $400, 000 $100, 000 taxable (taxed) $120, 000 taxable (taxed) $280, 000 taxable (untaxed) Non-dependant child to receive this 25

Case study – Tanya Insurance held No anti-detriment Anti-detriment Separate super interest $583, 500 $599, 694 With accumulated super $554, 500 $570, 142 26

Death – pensions • Pension payments from a death benefit pension are tax free to a beneficiary • Once beneficiary reaches age 60; or • Pension formed with 100% tax free component; or • Deceased was at least 60 years old at time of death • Superannuation pension tax offset of 15% applies to taxable pension payment 27

Case study – Jake & Pam • Jake (49) has passed away with accumulated superannuation of $500, 000 • $400, 000 tax free • $100, 000 taxable • Pam (43) is Jake’s spouse and sole beneficiary of his superannuation benefits • $500, 000 death cover on Jake’s life is held via superannuation • Pam wishes to receive $500, 000 as a lump sum which will largely be used to repay home mortgage 28

Case study – Jake & Pam • Death cover forms part of accumulated superannuation interest Accumulated superannuation with insurance Remaining amount used to commence death benefit pension which will be 60% taxable $1, 000 $400, 000 tax free (40%) $600, 000 taxable (60%) 29

Case study – Jake & Pam • Death cover held separate to accumulated superannuation interest Super account Insurance via superannuation $500, 000 $400, 000 tax free $500, 000 $100, 000 taxable $500, 000 taxable Used to commence death benefit pension which will be 20% taxable 30

TPD & trauma cover • If withdrawals meet terminal illness definition • Lump sum payments will be tax-free • Pension payments could be subject to tax if under age 60 31

TPD & trauma cover • If withdrawals meet disability superannuation benefit definition, a tax-free invalidity amount is created according to incomplete service • Two qualified medical opinions required to sign-off that any occupation definition is met • Taxable component is taxed if recipient is under age 60 • Low rate cap of $140, 000 applies for lump sums received on or after preservation age • Pensions qualify for 15% tax offset 32

Case study – Lorna Tax free invalidity amount 40% incomplete service 35 65 53 TPD Service start Last retirement day • Assumptions • Lorna’s service period began on her 35 th birthday and her last retirement day is her 65 th birthday • She stops being capable of ever being gainfully employed on her 53 rd birthday 33

Salary continuance cover • Salary continuance payments are generally taxed at member’s marginal tax rates • Including from age 60 34

The 3 step approach 1. Make sure estate planning and accessibility needs can be met 2. Gross-up cover to take into account superannuation exit taxes 3. Conduct cost comparison of superannuation versus non-superannuation ownership 35

Case study – the Martin’s • Tom (43) and Lyn (42) have two children • Jackie (7) and Kylie (5) • Their financial planner has identified a need for $1, 500, 000 death & TPD cover on Tom’s life • A personally owned income protection policy is also recommended • Tom’s marginal tax rate is 41. 5% • His date of birth is 1 July 1964 and the fund’s relevant service period start date is 1 July 2000 36

Case study – the Martin’s • Superannuation death cover ownership • Required sum insured if lump sum to be paid to qualifying dependants is $1, 500, 000 • Required sum insured if lump sum to be paid to non-dependants is $2, 065, 045* • Taxable (taxed) component - $596, 628 • Taxable (untaxed) component - $1, 495, 417 * Assumed date of death is 1 July 2008 37

Case study – the Martin’s • Superannuation TPD cover ownership • TPD cover of $1, 731, 000 is required if $1, 500, 000 net lump sum to be paid* • Tax free component - $656, 581 • Taxable component - $1, 074, 420 * Assumed date of permanent incapacity is 1 July 2018 38

Case study – the Martin’s • Non-superannuation ownership • Premium - $2, 570 pa • Superannuation ownership • Premium - $2, 800 pa • Grossed-up TPD cover • If funded with salary sacrifice or personal deductible contributions, after-tax cost is approximately $1, 638 • Annual savings - $932 or 36. 3% 39

Case study – Rylie • Rylie (43) is seeking to establish cover via his super fund • Recommended net sums insured are $800, 000 death & TPD (own occupation) • Outstanding mortgage - $200, 000 • Dependants to receive $700, 000 on death • His date of birth is 1 July 1964 and the fund’s relevant service period start date is 1 July 2005 • Personally owned income protection (guaranteed cover) is in place 40

Case study – Rylie • Rylie’s marginal tax rate is 41. 5% and is able to implement a salary sacrifice strategy • What is the best ownership structure for Rylie? • After some investigation, Rylie only requires short-term access to $400, 000 on TPD • Outstanding mortgage - $190, 000 • Meet living expenses to age 60 - $210, 000 plus income protection benefits 41

Case study – Rylie • Option 1 • Non-super ownership - $800, 000 death & TPD • Premium - $1, 780 pa • Option 2 • Super ownership - $842, 095 death & $452, 726 TPD • Non-super ownership - $400, 000 TPD • Total premiums - $2, 022 pa • After-tax cost - $1, 453 (annual savings of $327 or 18. 3%) 42

Case study – Rylie • Option 3 • Super ownership - $842, 095 death & $400, 000 TPD • TPD not grossed-up as this will be withdrawn tax-free from age 60 • Non-super ownership - $400, 000 TPD • Total premiums - $1, 968 pa • After-tax cost - $1, 422 (annual savings of $358 or 20%) 43

Case study – Anna • Anna is a single mother with a modest annual income of $35, 000 • She personally owns death & TPD cover at an annual cost of $500 • Annual premiums if held via super is $600 • She cannot afford to pay more than $500 • Anna makes a $500 after-tax contribution to her existing One. Answer Personal Super account • Government co-contribution is $750 • Trustee rebate is $90 44

Cost & affordability 45

Life time spend Insurance Source: Business Associates Network, Dr Troughton provides consultancy services to businesses and individuals 46

Price should not compromise advice • Funding cover via superannuation with pre-tax income or existing superannuation savings • Trauma in self-managed funds • Premium freeze on term life, TPD and trauma • Income protection • Standard protection products up to a 30% saving • Indemnity cover up to a 20% saving • Split waiting and benefit period up to a 30% saving 47

Other issues 48