BT’s Steve Craig explores the cost effectiveness of different ownership structures for life insurance. In what can sometimes be a complex web of scenarios involving insurance and superannuation, Steve offers some clarity…
It’s well-known that holding insurance cover inside a risk-only superannuation fund (ie master trust) may give a client the advantage of an upfront 15% tax rebate, if annual premiums are funded via partial rollover.
However, what may not be as well-known is that an equivalent 15% concession generally applies if the insurance were instead held within a platform super fund, or a self-managed super fund. The net cost of the cover under both structures may therefore be the same.
Knowing exactly how the costs of the two structures compare could save the adviser and client from having to create a new super account.
Example of how a concession applies on cover via platform super:
Note: refer to the diagram below, which shows how the various tax rebate / concession plus any discounts apply across different life insurance ownership structures.
Let’s look at an example where an adviser has structured a client’s life and TPD cover via their existing platform super. From a fund accounting perspective, the annual premium the trustee pays gives rise to a corresponding tax deduction, which the trustee can use to offset the tax it has to pay on assessable fund income received. In recognition of the fund’s lower tax liability, the trustee generally passes on a tax ‘credit’ into the client’s super account.
So the net cost of the cover is likely to end up being 85% of the ‘headline’ premium (total premium less 15% tax credit), which is identical to the cost if cover is held in a risk-only super fund and funded via partial rollover.
Some insurers offer an additional 10% discount if cover is funded from a qualifying platform, further reducing the cost and impact on the client’s retirement savings. Further discounts may apply. For example, up to 30 April 2020, BT is offering a 25% discount off the first year’s premium for new stepped premium BT Protection Plans lump sum policies – effectively 3 months of free cover.
An important point to consider is any timing differences; that is, how quickly does the trustee pass back the tax-credit following payment of the premium? Additionally, in some instances the tax-credit may be ‘socialised’ with other members of the fund, potentially diluting the credit in the pass-back process.
Cost effectiveness is a crucial consideration when providing advice on ownership structures for life insurance. BT encourages advisers to contact their BDM to find out more about how a tax rebate, concession or discount may apply.
Steve Craig is Head of Adviser Distribution, Life Insurance, BT