The end of a financial year can keep advisers busy sorting out last minute details of their clients’ financial affairs.
Yet, as Crissy DeManuele from BT Financial Group writes, the beginning of the new financial year can provide advisers with opportunities to have fresh conversations, or review past discussions, around life insurance.
Crissy highlights a number of key areas advisers should consider around life insurance inside superannuation following changes in last year’s Federal Budget.
By examining these, Crissy says advisers may pick up some issues that need attention and avoid future unintended consequences.
The beginning of the new financial year is often a time when clients are in close contact, and advisers can discuss a range of topics including their insurance arrangements.
No matter what time of the year, advisers are in a pivotal position to help clients understand the importance of insurance, particularly considering how underinsured Australians reportedly are: the median level of term life cover only meets 61% of basic needs; and total and permanent disability (TPD) and income protection (IP) cover, only 13% and 16% of needs respectively.
However, the new financial year can mean a fresh start and a time to reflect on the big picture – such as the peace of mind that life insurance might give to clients and their family. Four key insurance considerations are discussed below.
Assess whether insurance should be held inside super
There are various reasons why a client may hold their insurance inside super. Holding insurance inside super may provide tax benefits, ease cash flow, or provide the ability to commence a tax-effective income stream if a claim is made. It is quite common to combine cover inside and outside super, to utilise the possible benefits of either structure.
Before considering whether a client may hold insurance inside super, thought should be given to the contribution limits. For the 2018/19 financial year, the non-concessional contribution (NCC) cap is $100,000. Where a client’s total super balance is at least $1.6 million on 30 June 2018, their NCC cap is nil. The concessional contribution cap is $25,000.
For some clients, it may be difficult to maintain their current retirement savings plans, in conjunction with funding insurance inside super through contributions, because of the contribution limits. If insurance is held inside super in order to access the tax advantages of funding policies through concessional contributions, and a client’s concessional contributions exceed the cap, the tax savings may not be as beneficial.
With this in mind, it may still be valuable to hold insurance inside super, as the cost of providing the insurance within a super fund is deductible to the fund. This can effectively reduce the cost of insurance when it’s held inside super.
Another benefit of holding insurance inside super is to allow retention of any claim proceeds to remain inside super in a potentially lower taxed environment, with regular payments received via an income stream.
The amount that can be used to commence a pension, under the transfer balance cap rules, depends on who receives the pension, the type of death benefit pension, and how many beneficiaries there are. The amount of insurance held within super and whether or not the premiums are funded from accumulation phase or retirement phase also impacts how much can be paid as a death benefit pension. In the case of a child receiving a death benefit, the amount which can be received as a pension also depends on the amount of retirement phase interest that the deceased parent had at the date of their death.
it is essential to review the level of cover that each client has, as their circumstances may have changed since their last review
Taking into account all of these factors and the client’s personal circumstances can form the basis of a complete insurance assessment.
Review method of funding insurance inside super
If insurance is held inside super, the premiums can be funded from contributions, rollovers, or the account balance.
The type of contribution that provides the largest benefit to each client will depend on their circumstances, which may change over time. For example, a low income-earning client may benefit from the co-contribution (or their spouse may benefit from a spouse contribution offset) and therefore a non-concessional contribution could be made. The spouse contribution tax offset will be available to a client where their spouse’s income is less than $40,000 per annum.
Middle to high-income earners who may be ineligible for other benefits can reduce their taxable income through concessional contributions (salary sacrifice or personal deductible contributions).
Rollovers can be useful when the client has cash flow restrictions, but the insurance offered within their existing super fund is not considered suitable. Rollovers can allow the insured to access alternative insurance while still utilising their superannuation savings to pay for the premiums.
Determine whether clients should make personal deductible contributions to super
Since 1 July 2017, taxpayers have been able to claim personal contributions into super as a tax deduction, regardless of where income is sourced (assuming all other criteria are satisfied).
While the tax benefits are the same as salary sacrificing, having access to this option allows employees to fund insurance on a pre-tax basis, when they are not able to salary sacrifice. Sometimes putting in place salary sacrifice arrangements can be difficult, as both the employee and employer must agree to the terms – especially when the amounts vary each year, as they generally do with life insurance.
This approach may also allow clients to manage their cash flow better. Some clients do not know how much they can afford to salary sacrifice throughout the year. Personal deductible contributions can be made at the end of the financial year when they are in a position to know how much they can set aside to contribute.
It’s important to note that if the client wants to claim a deduction for the contribution made to super, they need to provide a notice of intent to claim to the super fund prior to completing their tax return, withdrawing the super money, rolling it over to another fund or commencing an income stream.
Review total level of cover
When assessing the relevance of current insurance arrangements, it is essential to review the level of cover that each client has, as their circumstances may have changed since their last review. For example, a client’s needs may change if they marry, have children, start a business or take on more debt.
The Guaranteed Future Insurability Benefit allows the sum insured to be increased without further medical underwriting when certain life events occur, such as marriage, divorce, birth or adoption of a child, taking out or increasing a mortgage, salary increase or death of a spouse. Some policies also allow an increase to cover periodically; for example, every three years.
Insurance needs will be different depending on what life stage each client is in. Insurance advice, and the policies that go with that advice, should be flexible enough to provide an appropriate and easy solution at any stage.
Revisit beneficiary nominations
While non-super term life policies generally do not restrict who can be named as a beneficiary, it is worthwhile reviewing the current nomination, to ensure that it is still appropriate. Under superannuation laws only certain people can be named as a beneficiary.
Super policies may be subject to different types of beneficiary nominations – binding, non-binding, or non-lapsing. If compliant with super law, a binding nomination will be followed by the super fund trustee, but generally must be renewed every three years. A non-binding nomination remains indefinitely, but is only provided as guidance to the trustee. A non-lapsing nomination also remains indefinitely (unless revoked or amended).
The validity of the non-lapsing nomination depends on the terms of the trust deed, and may require trustee discretion when the deceased’s circumstances change; e.g. marriage, divorce, or death of a beneficiary.
In any scenario where trustee discretion is applied, the trustee will act conscientiously. However, the only way to ensure that term life proceeds are paid to the client’s intended beneficiary is to regularly review the nomination, and ensure it is aligned with the super laws and the trust deed.
While it’s important to review insurance cover arrangements on an ongoing basis, it is worthwhile thoroughly assessing the impact of the 2017 super changes on insurance-related advice. Understanding what the changes mean for your clients will help you determine whether any action needs to be taken, and prevent unintended outcomes.
 Rice Warner, Underinsurance in Australia 2015
Crissy DeManuele is a Senior Manager – Product Technical, Life Insurance, BT Financial Group.