Many of us often look at what we pay for our insurance cover over a year and wonder if there are ways we can cut the cost of insurance without jeopardising the cover. One option is to facilitate the insurance cover via your superannuation fund.
Mike’s case
Mike and Terri are both aged 38 and have three children under six. Mike earns $100,000 a year and Terri and the children rely on his income. They have a $300,000 mortgage and know they are taking a big risk not having life insurance. However, they rely on every dollar Mike earns and don’t think they can afford the premiums.
They discuss their circumstances and needs with a financial adviser and agree that ideally they need about $1.6 million dollars of cover. This would include funds for Mike’s medical and funeral expenses if he got very ill and died, paying off the mortgage and providing an income for Terri and the children. Mike is charged a premium of about $3,500 in the first year.
Their adviser shows them how they can afford the premiums by arranging the cover in superannuation and salary sacrificing the premiums. The table shows their expenses are $40,000 a year and have a very small surplus at present (insufficient to meet the insurance premium). Mike would need to salary sacrifice $4,117 (to allow for the 15% tax in superannuation) but this would reduce the amount of income tax he pays and maintains some of their surplus as well as paying for the necessary life cover.
| Curent | Proposed | |
| Income | $100,000 | $100,00 |
| Salary sacrifice | $0 | $4,117 |
| Taxable income | $100,000 | $95,883 |
| Tax | $26,447 | $24,862 |
| After tax income | $73,553 | $71,021 |
| Mortgage | $30,000 | $30,000 |
| Expenses | $40,000 | $40,000 |
| Surplus | $3,553 | $1,021 |
The need for review
This case is based on Mike and Terri’s circumstances today. What if they had another child or received an inheritance? Next year the premiums will be higher because Mike is a year older – will they still need the same level of cover? Mike’s employer will be paying into superannuation for him and as his account grows he may need less cover.
Some types of insurance are treated differently when held in a super fund and there is a range of issues to consider, so it’s important to seek professional guidance from your financial adviser first.
Disclaimer: The Case study in no way suggests that a single income family earning $100,000 with a $300,000 mortgage requires $1.6M of insurance and should your circumstances be similar an individual review of your needs is still required.
Sources: www.ato.gov.au
If you would like to learn more about how you can cut the cost of insurance please contact our expert Risk Management Advisors.
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