Life Insurance –Protection for Your Family

Term Life Insurance

Term Life insurance protects your family and dependants by paying a lump sum if you die, or in some cases, the benefit can be paid earlier if you are diagnosed as being terminally ill.

Life insurance benefits

It is important to work out individually what you need to protect and how much cover you need. But the lump sum payment can be used for goals such as:

  • covering the cost of funeral expenses
  • repaying your mortgage, credit card and other debts so you can pass on the full value of assets to your dependents
  • generating an ongoing income stream to help your family to meet their future living expenses and maintain their lifestyle
  • setting money aside for future education costs for your children or grandchildren
  • enabling your estate to treat your beneficiaries equitably without the need to sell particular assets
  • making charitable bequests
  • covering other expenses such as childcare and housekeeping.

Without insurance, your family or dependants may need to run down their savings, sell assets, and/or rely on family or Centrelink for assistance. They may also find it difficult to maintain their standard of living.

Life insurance structures

Self-ownership

Owning your life insurance in your own name means you pay the premium from your cashflow and the proceeds are paid to your nominated beneficiary or to your estate. Self-ownership gives you control over the policy, the right to nominate who receives the proceeds and the right to cancel if the need arises. The premiums for self-owned life insurance are not tax deductible but then the benefits paid are tax-free.

This structure may suit if you want the benefits to bypass your estate so you can be certain that they are paid directly to your nominated beneficiary.

Superannuation ownership

Alternatively, you can apply for cover to be owned within the superannuation environment. This allows the premium to be paid by making contributions to super or simply be deducted from your superannuation account balance so it does not affect your cashflow. 

In the event of your death, the insurance proceeds will be paid into the superannuation fund. The trustees of the fund will then pay a death benefit to your beneficiaries or estate. You may be able to make a binding nomination to ensure the trustees pay in accordance with your wishes. Tax may be payable on the death benefit depending on how the benefit is paid (lump sum or pension), who the beneficiary is and the age of the beneficiary. This can make superannuation ownership a less tax-effective method of policy ownership.

Superannuation ownership may be suitable for you if you do not have the cashflow to make the premium payments, receive contributions from an employer into superannuation, are eligible to make salary sacrifice or personal contributions, have a spouse on a low income or are eligible for co-contributions, or are self-employed. Tax concessions can reduce the cost of insurance and may enable certain beneficiaries to receive all or some of the death benefit as a tax-effective income stream. If additional contributions are made into superannuation to cover premiums it is important to ensure you do not exceed the limits on how much can be contributed.

Life insurance details to consider

  • For self-owned life cover, if you do not nominate a beneficiary, the proceeds will form part of your estate and will be distributed in accordance with your Will. Directing proceeds to your estate may provide the opportunity to use a testamentary trust to provide a tax-effective future income for dependants particularly if you have young children or grandchildren.
  • Funding the premiums from your superannuation balance will reduce the growth of your retirement savings unless you make additional contributions to offset the premiums. These contributions will count towards your contribution caps.
  • Where your sum insured is large, not all of the benefit may be able to be taken as a tax-effective income stream by your beneficiaries after 1 July 2017.
  • No death benefit will be paid if death is due to suicide in the first 13 months or if you do not fully disclose all required information.
  • To be eligible for payment as ‘terminally ill’, generally two doctors must certify you have less than a set number of months to live, usually 24.
  • Superannuation providers must cancel a member’s insurance cover in their super fund if their super account has been inactive, that is, hasn’t received a contribution or rollover for a continuous period of 16 months, unless the member specifically elects to keep their insurance. In addition, superannuation providers may have their own rules that require the cancellation of insurance on super accounts where balances are too low. If this applies to your insurance in your super account, you’ll be sent a notice before any insurance is cancelled. Please make sure your contact details are up to date.
  • It’s important to seek professional legal advice and consider your overall estate planning position to ensure your wishes are carried out upon your death.
  • You should always carefully read the Product Disclosure Statement (PDS) and policy document for your selected insurance policy and keep these documents in a safe place.

WHAT’S YOUR PLAN B? A WALTER WHITE CASE STUDY

Learn more about how life insurance works in this award-nominated fictional case study. 

Contact Orbital Life. We’re happy to help.