Insurance – Turning that “grudge payment” into a tax saver and retirement booster. Let’s face it, nobody likes paying insurance. From experience in this profession over the last 15 years, I can tell you if there’s one thing worse than paying insurance, it’s claiming on it. I personally hope and pray that my insurance premiums will be the biggest waste of money I’ve ever embarked on.
But can we turn this “grudge payment” to our favour, and package it in a way it saves us tax and gives us more in retirement?
We all know the importance of an adequate and comprehensive insurance package for working people and families. When your entire financial security, and that of your family, hinges on the weekly, fortnightly or monthly
paycheck coming in to keep the house and pay the bills, you want to make sure somebody will step in to make ends meet if you can’t.
Unfortunately, quite often those that need insurance the most – those with large debts, single income families, families with young children – are the ones who can afford it the least. Quite a Catch 22 isn’t it?
There is a solution.
The Australian superannuation system allows you to hold Life, Total and Permanent Disability Insurance and Income Protection Insurance in your superannuation or pension fund, and have premiums paid for from the fund. This means that the burden on your cashflow is removed, while giving you and your family the protection you want.
Will that not impact on my retirement savings?
Yes, and no. In some cases it can actually boost the retirement savings (we’ll show you how in just a bit).
Clearly any expenses from the fund will reduce funds available to you in retirement. Many families may choose to fund it this way for a short while, until their circumstances become more solid, and then either switch the insurances to outside the fund, or make contributions to the fund to top up the expense. Or even when you do have the funds, you can choose, with the assistance of an advisor, whether it is better to continue to fund premiums from super and use the extra cash to pay off your mortgage faster for example.
There are many who can in fact afford the premiums, and still choose to fund in superannuation for the added tax saving benefit they receive.
For example, let’s say somebody has an annual life insurance premium of $1000, and let’s assume they earn an income of $85 000 per annum (putting them in the 34.5% marginal tax bracket). For them to have the $1000 net every year to pay that premium, they in fact need to earn $1526, pay 34.5% tax ($526) to be left with the funds to pay the insurance.
Let’s now assume you have that same $1000 insurance premium inside super, and you salary sacrifice the $1526 into the super fund. You still only miss the $1000 from your pocket that usually went out to the insurance premium, so you’re no worse off. However, the super fund only pays 15% tax as opposed to your marginal rate. So, $1526 goes in, and pays an insurance premium of $1000. This leaves $526 in taxable income to the fund, on which tax of 15% tax is paid boosting your super balance by $447, adding to your retirement savings for the same insurance outlay.
Alternatively you can just salary sacrifice the $1000 into the fund, keep the extra $526 in income and pay tax on that, leaving you $344 in your pocket to put against your mortgage or whatever other worthwhile pursuit you choose.
Empire Financial Group are experts in this field, and can assist you to package a competitive and comprehensive insurance package, providing savings through the use of the unique tax benefits the Australian super system allows. Call us on 9323 3000 to arrange an appointment to discuss your circumstances further.