Life Insurance
Term Life (Death) insurance
Term life insurance is the most common form of life (death) insurance policy currently available in the Australian market. It provides cover in the event either of death; or of terminal illness. Life insurance products allow families to outsource risk to insurers:
- the risk they take in borrowing to buy homes;
- the risk they take going into debt to acquire assets (lifestyle or investment); and
- the risk they take in starting a family.
How these products fit into an individual plan; and how much cover (protection; also known as ‘the insured amount’) is needed must be properly assessed in each circumstance.
How life insurance policies work
They are usually available to people aged between 16 and 70, though cover can be renewed to 99. The standard term life insurance policy offers no surrender value – that is, there is no investment or savings component.
There is a cooling off period of 14 days following the commencement of the policy during which the policy can be cancelled (and the initial premium fully repaid).
The benefit from a term life policy is that a lump sum payment is made in the event of the death or diagnosed terminal illness of the insured. The terminal illness benefit is normally limited to $1 million for all policies. If the benefit is paid, the remaining term life cover will be reduced by that amount.
Some insurers allow the insured to increase their cover without further medical evidence in special situations such as:
- getting married;
- the birth or adoption of a child;
- taking out or increasing a mortgage;
- a salary increase of $5,000 or more.
There will typically be limitations regarding the timing and amount of the increase. An annual review of your insurance policies should be conducted with the assistance of your financial adviser.
Life Insurance Premiums
Premiums will generally increase on an annual basis: this may occur as the amount of cover increases through indexation; and/ or through the increased risk to the insurer realized as the insured ages.
Level premiums (usually higher than stepped premiums when the insured is younger) increase with CPI, but in effect remain the same throughout the life of the insured. Stepped premiums increase as the insured ages and over time, will increase to an amount substantially higher than the level premiums.
Stepped premiums may be frozen at a level selected by the insured, but their level of cover will be reduced accordingly each year.
Most policies are guaranteed renewable by the insurer. That means the policy will be renewed each year as long as the insured wants to continue the policy. The insurer can’t refuse to renew the policy on the basis of an increased risk of mortality to the insured.
Life Insurance Policy Exclusions
Term life policies have some exclusions. The more common ones are:
- suicide of the insured within 13 months of commencing the policy;
- war, or similar events such as civil strife;
- pre-existing conditions not disclosed on the application;
- AIDS cover might only be included on the policy as an option.
Taxation implications for premiums and payouts (from Life Insurance policies)
Taxation of premiums and benefits depends on the purpose of the cover, and the relationship between the policy owner and the insured.
Generally, premiums paid by an individual are not tax deductible, nor are the proceeds of the claim assessable. Premiums are tax deductible if the owner of the policy is a superannuation fund – whether under a superannuation plan of an Insurer, or held in a self managed superannuation fund1. If an employer pays the premium on behalf of an employee, it will be subject to Fringe Benefits Tax.
The benefit payment is not taxed, but the income arising from investment of the benefit is. The income arising from investment of the benefit may be taxed concessionally if the amount is held in a death benefits trust or testamentary trust for the benefit of minors. Minors who receive income arising from the payment of death benefit will have this income taxed at adult marginal rates of tax and will get the benefit of the normal tax-free threshold.
Life insurance and superannuation
A superannuation fund can be the owner of a death and total and permanent disability policy. The main advantage of holding the policy within the superannuation fund is related to tax.
Premiums paid by the fund are deductible. Pensions paid by the fund to a dependent as a result of the death of the insured may either be tax-free or concessionally taxed (though if the benefit includes an element untaxed in the fund and both the deceased and beneficiary are less than age 60, it will be taxed at marginal rates of tax). Lump sum benefits paid to a dependant will be tax-free. See the related content item below for further information.
Ownership of policies of life insurance
A decision will need to be made as to whose life is to be insured and who is to receive the benefits. The application form will ask for details of who the beneficiaries are to be in the event of the death of the insured. If no beneficiaries are nominated, the benefits will pass to the policy owner. If the owner is deceased, the benefit will pass to the owner’s estate.
If a superannuation fund owns the policy the trustee will be the owner. The trustee will decide to whom to pay the benefits, unless the member made a binding death benefit nomination.
It’s time to act…
Ensure that your lifestyle (and that of your family) is financially secure and is properly planned: our experienced advisers at Continuum Financial Planners Pty Ltd have a wealth protection plan suited to your personal circumstances: call our office (on 07-34213456), or use the website contact us facility now, to arrange a meeting to review your personal financial protection strategy.
1Holding TPD in a SMSF requires careful planning because of the superannuation legislation constraints on what funds can be released to a member (the ‘conditions of release’) may not allow for the payment to be made, albeit that the claim under the policy was eligible – and the claim paid to the trustee!
We acknowledge the contribution from Deutsche Bank through its Desk Caddie for the core content of this article, to which we have added some additional information.
[This post was originally published in February 2010: and has been updated/ refreshed from time to time, most recently in March 2017.]
