Life Insurance provides a lump sum payable on your death.  Life insurance is particularly important if you have dependants, because it is a simple and cost-effective means of providing financial assistance to help your loved ones maintain their lifestyle in the event of your death.  When the benefit becomes payable, it is normally paid to your dependants, estate or superannuation fund.  This lump sum could be used to pay back any outstanding liabilities and/or provide an income stream.  This mitigates financial stress that your dependants may face upon your death.

Most life insurance policies are term life policies, meaning the policy expires when the person insured reaches a particular age.

Buying Life Insurance

Life Insurance is generally available through your superannuation fund or directly from a financial adviser.  This choice will influence the cost of premiums, policy coverage and tax effectiveness.

Premiums

Life Insurance premiums depend on your personal circumstances at the time you apply for the insurance.  However, premiums are usually relatively inexpensive.  The cost of premiums will depend on a range of considerations including your current health, occupation, family health history and any other risk factors (such as whether you smoke).

Group Life Insurance through employer or corporate superannuation fund

When you start with an employer, unless decided otherwise, their default super fund offers you a minimum level of cover that you can maintain, increase or opt out of.  There are several factors that should be considered with default cover:

  • Is the default cover sufficient to meet the needs of you and your family?
  • Do you lose coverage if you change employment or superannuation fund?
  • Will benefit payments be delayed because they are in paid to the trustee of the superfund rather than directly to you?
  • Are there any exclusions to the Automatic Acceptance Levels (AAL)?  AALs are the amount of cover that is provided without the need to provide evidence that you are of good health.

Benefits of individual life insurance

Purchasing life insurance individually (rather than accepting the default cover provided by your super fund) can have numerous benefits.

Individual life insurance allows you to select a policy that suits your needs, ensuring you have the optimal level of cover.  Not all insurance is equal, so it is vital to ensure that your cover is appropriate to where you are in the lifecycle, or even evolves to suit your changing circumstances.

Individual life insurance may also provide the opportunity to link or combine your life insurance with other personal insurance (such as Total and Permanent Disability Insurance and Trauma Insurance).

Individual life insurance may also be held in your super fund, ensuring tax effectiveness.

Moreover, it is important to note the distinction between an agent and a broker.  When a superannuation fund provides life insurance, they usually act as an agent for a specific insurer.  This potentially limits your product choice, and may mean that you do not obtain appropriate and cost-effective insurance coverage.  Conversely, a broker helps you choose the most appropriate insurance from a range of insurance houses.  As a licensed life insurance broker, Cornerstone Insurance considers life insurance products from a panel of more than 10 insurance houses (where possible), providing impartial advice on which product is most appropriate to your personal situation. 

We are happy to discuss your personal situation and advise whether you need life insurance, and if so, which policies are most appropriate. 

How much cover

It is vitally important that you have the right level of cover to support your family.  Underinsurance may leave your dependents in financial difficulty, while overinsurance means you will incur unnecessarily high premiums.

The level of cover you need is largely determined by the financial commitments of you and your dependents.  Considerations include debts (mortgages, credit cards and personal loans), your children's future education costs, funeral expenses, and replacement income for any other ongoing expenses your dependents will incur.  The level of cover required may be reduced by the earning capacity of your dependents and existing savings (including superannuation).    

Life Insurance cover should include:

  • A repayment or reduction of your debts (credit cards, personal loans, home loans, investment loans etc) - this should include planned house upgrades or renovations.
  • Investment capital to provide an income stream for your surviving spouse and/or dependents.  The capital required to provide the desired income stream will depend on the how this capital is structured and how income will be taxed. Please refer to the estate planning section for more details.
  • Education expenses for your children so they may finish secondary school/university.
  • Funeral expenses.
  • Payments for outstanding tax liabilities and allow for your estate to be divided equitably without the need to sell assets.
  • Capital required for business succession.

We will work with you to calculate the level of cover that will provide your family financial security.

Tax Considerations

Life Insurance premiums are only tax deductible inside the Superannuation environment.  Therefore, life insurance premiums should should be paid through superannuation (unless the taxpayer has no dependants and has a marginal tax rate of 15% or less).  A dependant for the purpose of a Superannuation death benefit is:

  • a spouse or de facto spouse;
  • a former spouse or de facto spouse;
  • a child of the deceased under 18 years of age;
  • any person who relied on the deceased for financial maintenance at the time of the deceased’s death; or
  • any person who lived with the deceased in a close personal relationship where one or both of them provided financial and domestic support and personal care to the other.

A super fund is not taxed when it receives a life insurance payout.  However a 'death tax' may apply, depending on who the beneficiaries of your superannuation fund are.

Please note, superannuation death benefits can be paid out as either a lump sum and/or as a pension.  Furthermore, not all superannuation tax dependants are entitled to receive a superannuation pension.

Generally, life insurance premiums should be held inside the superannuation environment but there are exceptions to this rule.

Can an existing life insurance policy be transferred to your super fund?

You cannot simply transfer your existing insurance policy into superannuation.  This is because the trustee cannot accept a transfer of an asset (the life insurance policy) from a member (you).

However, there is a potentially simple solution to this problem.  With the agreement of your super fund, your insurer may be willing to cancel your existing policy and reissue a new policy in the name of the trustee of the super fund on identical terms. 

To find out more about moving an existing policy, click here. 

However, careful consideration should be given to ensure the individual does not lose any benefits from the original policy when having the policy reissued in the name of the trustee.

In most cases, there is no additional risk for then life insurance provider and they would permit the cancellation and reissue without additional underwriting.

Some providers may nevertheless see this as an opportunity to refresh the policy's terms and conditions, which would cause detriment to the policyholder's detriment.

Generally speaking, only Self Managed Superannuation Funds (SMSFs) and superannuation funds that use your existing life insurance provider, will allow such a transfer.

Estate Planning and Life Insurance

The structure of your estate plan will help determine the correct level of life insurance cover.  This is because it determines:

  • How much of your estate is transferred to your dependants (after tax considerations)
  • Tax on income from your estate.