Who Needs Income Protection Insurance?

by admin on August 17, 2010

Your mortgage is almost finalised and you’re busy wondering how you will make ends meet on all the numbers that make up the repayments, Right?  But here is a few more numbers you really need to think about –

Did you know that for every

  • ONE home lost through fire there are              
  • FOUR  homes lost through death; and
  • FORTY-EIGHT  are foreclosed and lost through disability

 If only they had set up a simple insurance plan to save the day!

You’re thinking ‘how can I afford this extra expense?’

Our Answer:-  TAX DEDUCTIBLE Income Protection Insurance.

Chances are you have some insurance through your superannuation that offers cheap cover and you think  this will have it covered –but do you?

But consider these cases: –

1.   Single mother Jenny aged 48 years had 2 children aged 18 and 21, both still live at home and both work.  When Jenny died from a heart attack, her children were beneficiaries to her estate that included the family home which has a mortgage of $350,000 and her superannuation of $50,000.  The super fund also contained life insurance benefits of $300,000 which they thought they’d use to pay out the mortgage, but the children had to pay tax of approximately $105,000 when they received the super and insurance benefits, so had insufficient funds to pay out the debt on the mortgage.  They had to sell the house to pay off the debt and were left with insufficient funds to purchase a new residence. 

If Jenny had arranged her insurance outside of superannuation, the children would have paid no tax on the proceeds and could have retained the family home.

2.  Michael is 36 with a wife and two small children.  Michael is diagnosed with Multiple Sclerosis and is unable to work again as an IT executive.  He believes he is financially secure because he can make a claim on his Income Protection and TPD arranged through superannuation with an ‘own occupation’ definition.  However, he is surprised to learn the lump sum claim is delayed because the SIS regulations require that payment can only be made if Michael is unable to return to ‘any occupation’  rather than the ‘own occupation’ he thought that would apply.    Although he is able to receive the income replacement payment for two years, it provides insufficient income to meet the added costs of medical and home modifications required and he struggles to repay the mortgage and school fees he’s afforded whilst he was working.  Eventually the children must move to a state school and the family must also consider moving house. 

When Michael’s condition deteriorated enough to finally qualify for the ‘any occupation’ definition and receive the TPD benefit within his super,  he is devastated to learn he must pay lump sum tax on the proceeds.  He is equally disturbed to learn the tax would not have been payable had his insurance been arranged outside of superannuation in his own policy.

The moral to this story is that cheaper insurance might seem attractive while you’re paying the premium, but the outcome can be financially devastating if you haven’t taken all the relevant factors into account.

If insurance is required is unaffordable for the level of cover required, a superannuation fund can be a cost effective way to arrange the cover needed.  Arranging some cover will almost always be better than not having any cover at all.  However, it is usually the best policy to have your own portable cover that will have minimal tax implications when you go to claim.  If you are arranging insurance through super to meet expenses and debt repayments for family upon your death or disablement, you may need to increase the sum insured on insurance arranged to allow for the tax your beneficiaries will need to pay.                   

Written by

Leigh Riley M Bus FP, DFP Authorised Rep. No. 238 388

Director of JLR Partners – Accounting & Financial Planning

General Advice Warning: Important information

This publication has been prepared as general information only.  It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information, as I did not take into account the objectives, financial situation or particular needs of any particular person.  Before making a succession planning decision, you need to consider (with or without the assistance of an advisor) whether this information is appropriate to your needs, objectives and circumstances.  This Report has been prepared based on my understanding of the taxation laws current as at 18June 2007 and the continuance of those laws and their interpretation.

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