Advivo explains which entity is best to pay for your life insurance.
When it comes to estate planning, life insurance is something to consider and furthermore, what the benefits and drawbacks are of having insurance within your SMSF.
Types of insurance SMSFs are allowed to provide:
- Life cover
- Total and Permanent Disability Insurance (TPD); and
- Income Protection Insurance.
Tax Deductions
If the SMSF is listed as the policy owner, and the person being insured is a member of that fund, the premiums are tax-deductible*.
If the life insurance/TPD policies are held outside of the fund, the premiums are not tax-deductible. However, premiums paid for income protection insurance held outside of a SMSF are tax-deductible as long as no other income cover is held within the SMSF.
Cash Flows
If the policies are held within the fund, the premiums can be paid by the fund freeing up the members’ cash flow.
Policy Pay Outs
When premiums are paid out on a life insurance policy, it is considered a CGT asset and a CGT event will be triggered. Any capital gains or losses realised are either disregarded or not applicable. i.e. no tax to pay for insurance held inside or outside of SMSF.
However, benefit payments to non-dependants from SMSFs are generally subject to tax.
It is the trustees’ obligation to consider insurance as part of preparing an SMSF investment strategy. It is not compulsory to take insurance within an SMSF, although there can be benefits for having it within an SMSF#.
*TPD insurance is the exception to the rule. IF TPD is held on any occupation, deductions are 100%. If TPD is held on own occupation, the deduction is 67%. If TPD is held in a bundle with life cover, deductions are 80%.
#This information is general information only and has been prepared without taking into account your personal objectives, financial situation or needs. The information provides a high level summation of selected parts of legislation only. The legislation is complex and includes a number of conditions and overrides that may apply to individual situations. Interpretation and application of the information to your specific circumstances requires consultation with an accountant with a detailed understanding of your personal and taxation affairs and a qualified financial advisor before taking any action.
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