While most people recognise the value of life insurance, no one likes to pay more than absolutely necessary for cover. Fortunately there are ways that you may be able to reduce net costs without compromising on security.
The possibility of a sudden death or disability striking your family is a financial risk that is too great to ignore. Statistics tell us that:
- In a ten year period, one in five families will be impacted by the death of a parent, a serious accident or illness that renders a parent unable to work*
- Overall deaths in Australia between ages of 25 and 64 amount to 25,124**
- On Australia’s roads alone there were 1,156 deaths in 2014***
Simply hoping that “it won’t happen to me” is not really a valid option, when your family’s comfort and security is at stake, but for some there is the challenge to fit the cost of insurance into their budget. The good news is that there may be ways to reduce net cost, using strategies that creatively take advantage of legitimate tax saving opportunities.
How Steve and Georgia lowered the net cost of their life cover
Steve and Georgia and their two young children were a single income family, with Steve earning around $100,000 as a sales manager, while Georgia chose to stay at home to care for the two children.
Conscious of wanting to ensure future security, they arranged their life and disability cover with the help of their adviser. During their discussions the adviser also explained how careful arrangement of their cover ownership could reduce the net cost of cover.
Their cover package included life, TPD, income protection and trauma cover. The adviser suggested that by moving the ownership of the life and TPD components under Steve’s superannuation fund they could achieve substantial tax savings. The trauma cover and income protection cover would remain under personal ownership.
How the Life and TPD tax saving was achieved
The tax savings were achieved by Steve arranging with his employer to salary sacrifice the $1,800 life and TPD insurance premium. This simply involves diverting $1,800 of his pre-tax income into his super, thereby avoiding income tax on that amount. With a 39% marginal tax rate, (including Medicare levy), this resulted in a tax saving of $702.
Without this strategy the $1,800 premium would need to be paid from after-tax income, which at Steve’s tax rate would require $2,950 of gross income – a difference of $1,150.
To achieve further savings, they were also able to increase the amount of salary sacrifice into Steve’s super to then transfer into a super account in Georgia’s name to cover her life and TPD premium as well. Such savings could occur every year and could enable the money saved to go toward their lifestyle or perhaps be diverted into their wealth accumulation plans.
The value of seeking advice
This is just one example of how an adviser can help to increase the efficiency of your financial plan to help you achieve your goals and advance your financial security and growth. While this particular strategy may not be suitable for everyone, it does illustrate how clever use of the available rules can garner substantial savings.
* The Lifewise / NATSEM Underinsurance Report 2010
** Source: ABS, Deaths, Australia, 2013
*** Road Deaths Australia 2014 Statistical Summary, Bureau of Infrastructure, Transport and Regional Economics