Changes to Income Protection Insurance
19.12.2007
For many years it has been an established practice for many people to hold their Life, Total and Permanent Disablement (TPD), and Income Protection Insurance (also referred to as Salary Continuance or Disability Income insurance) through superannuation. The effect of this strategy is that the superannuation fund arranges the insurance on the life of the member. This can help with managing personal cash flow as it is the super fund that pays the premiums. Premiums will generally be tax deductible to the super fund.
However, when it comes to Income Protection insurance, there were historical reasons as to why holding this inside super may not have been the most effective strategy. Income Protection Insurance is designed to replace income in the event of the insured suffering from an illness or disability. The insured selects the term that benefits are to be paid for. For example, a benefit period may be provided for a maximum of (say) two years, or to a specified age (such as to age 60 or 65).
In the past, the ATO only allowed a tax deduction for Income Protection Insurance premiums to the extent that the premium related to a two year benefit period. That is to say, if a person held Income Protection Insurance inside super that provided benefits to (say) age 65, only a portion of the premiums would be tax deductible. With this in mind, many super funds used to limit the level of Income Protection Insurance cover that they offered through super to a two year benefit period.
Earlier this year the Australian Taxation Office announced they were removing the year benefit period limitation on deductibility of Income Protection Insurance premiums.
A super fund may now claim a tax deduction for Income Protection Insurance premiums irrespective of the length of the benefit period. It is therefore an opportune time for people who hold their Income Protection Insurance through their superannuation fund to review the terms, conditions, and benefit periods applicable to their cover.
Of course, where a person holds Income Protection Insurance in their own name (that i.e. outside of super), the premiums will generally also be tax deductible at the personal level. With this in mind, appropriate structuring of the ownership of your Income Protection Insurance (inside or outside super) becomes critically important.
Source: Peter Kelly, Professional Investment Services