People holding life insurance within superannuation may need to reconsider that strategy following the changes to Concessional Contribution Caps in the recent Federal Budget with insurance premiums set to occupy a significant part of the cap, according to research house DEXX&R.
DEXX&R stated that the recent reduction in the Concessional Contribution Cap to $25,000 from 1 July 2017 with significant increases in new business for Death, TPD and Income Protection benefits held inside super may result in insurance premiums occupying more than a third of that cap.
Using modelling based on ten life insurance offerings through retail and industry funds insurance premiums would occupy an average of 42% of the cap across the ten super funds based on a member aged 50 next birthday with $2 million Death and TPD and $12,000 per month Income Protection.
Similar modelling for a super fund member turning 55 at their next birthday resulted in the member allocating an average of 71% of the $25,000 Concessional Contribution Cap to insurance premiums.
DEXX&R said the premium calculations were based on a professional white collar occupation and premiums payable for TPD and Income Protection by a member in a higher risk occupation would be considerably higher.
However, even members with lower levels of cover inside super – such as $1 million of Death and TPD cover and $10,000 a month Income Protection Benefit coupled with Concessional Contributions of $18,000 per annum – would still allocate 37% of their Concessional Contributions each year to insurance premiums at age 50 and 60% at age 55.
“Financial planners will need to consider this impact on a member’s accumulation balance when considering whether high levels of insurance cover should be held inside super…”
“Financial planners will need to consider this impact on a member’s accumulation balance when considering whether high levels of insurance cover should be held inside super, and in particular the impact on retirement income for members with balances that are well below the $1.6 million that can be transferred on retirement to a complying income stream,” DEXX&R said.
Despite the possible impacts on Concessional Contribution Cap, DEXX&R also stated the levels of insurance premium inflows into superannuation for group risk business would remain unchanged but may change for individual premiums within super
“We anticipate that the lower Concessional Cap will have minimal impact as premium inflows in the Group Risk market are largely based on default cover and only a small proportion of total premium is generated by higher levels of voluntary cover,” DEXX&R said.
However, the research group stated individual premiums within super may drop back to the levels of five years ago, despite an ongoing need for insurance cover, as advisers and clients consider whether superannuation is the best vehicle for insurance cover and that income protection premiums paid outside super are tax deductible and life insurance outside of superannuation was “…demonstrably superior in terms of definitions and benefits when compared to the equivalent inside super product”.
Not maybe but definatly ! particularly if your an older worker needing life insurance cover to ensure debts are secured in event of a claim
Look at anyone over 60 { maybe 50 } and see what premiums they pay. Most tax benefit will be eaten up in these premiums { cap of $25k} leaving little incentive to tip more non concessional funds into your super investment section. Yes I know ! Growth taxed at 15% but that is the only benefit !! 15% for now ???
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