Tax benefits of SMSF insurance

Structuring your life insurance through your SMSF offers many tax advantages, as well as the obvious cash-flow benefit of having premiums paid from the cash in the fund.

The main benefits

  • In most circumstances, superfund contributions are concessionally taxed, which means your life insurance premiums can be considerably cheaper than they would be if you held the policy direct. You can effectively get a tax deduction for premiums which you would not otherwise be able to claim against taxable income, so the higher your marginal tax rate, the higher your saving. For example, if your annual premiums were $3000 and you are on the highest 46.5% tax rate, your effective premium cost (in after tax dollars) could be as low as $1613.
  • SMSFs can potentially claim deductions on TPD premiums which you would not be able to claim as an individual. If you have an 'own occupation' policy your SMSF may only be able to claim a partial deduction.
  • SMSFs may be able to apply a unique tax advantage which can be very valuable. They may claim a one-off tax deduction in a year in which they receive either a TPD or death benefit payment. This allows them to offset part of the benefit against the tax they have to pay on other income.
  • If your SMSF receives a death benefit payment when you die, it may be able to pay benefits to financial dependants tax-free.

The downside

Although there are many tax advantages to holding your insurance within your SMSF, there are also some pitfalls.

  • Generally, lump sum payments made under TPD and trauma claims will be tax free. As long as these payments are able to be passed on to you by the SMSF this will still be the case.
  • However, if the SMSF must retain the money, because you have not satisfied the conditions of release, then generally this money will be treated in the same way as the rest of the fund's assets. If any of the beneficiaries of the fund are not your financial dependents (for example, if some of your estate will go to your adult children), then they may have to pay tax on what they receive, including the insurance payout which may have otherwise been tax-free.

You should speak to your financial advisor for specific tax advice and guidance on the best way to structure your insurance.

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