Superannuation is Australia’s signature retirement program. It helps you achieve a measure of financial security in your old age by allowing you to make contributions to a long-term savings plan – alongside your employer – for your future retirement. One of the best options available inside of a super plan is the ability to purchase life insurance. This is done through a “salary sacrifice” program with your employer, and can add a substantial benefit to those you leave behind.
Choosing Life Insurance
Life insurance might be the first thing you think about inside of your superannuation plan. However, it’s a great way to provide for your family when you can’t be there for them. Life is unpredictable. No one wants to think about their death – but it happens. The reality of it is that you could be snatched from your family at any moment.
Life insurance provides access to funds almost immediately. Those funds can be used to replace income that your family is counting on to pay bills and other future expenses like a college education for your children.
Since widows and orphan benefits are very limited from the Australian government, a life insurance policy is almost a necessity if you want your family to have a good life after you’re gone.
Tax Deductibility
When you buy life insurance inside your super plan, you can deduct the premiums you pay. That means you can buy more life insurance, since none of the money used to pay premiums comes from after-tax dollars.
More premiums means a bigger death benefit. Another way to put it is that you’re effectively getting cheaper insurance – by virtue of the fact that there’s no drag on your income used to pay premiums.
Self-Employed Life Insurance Purchases
If you work for yourself, you’re in a precarious position. You need life insurance for your family, but you might also need it for business purposes. Let’s say you have business partners. If one of you dies, then the other remaining partners needs a way to buy out the deceased’s share of the company.
In Australia, the business will go to the deceased’s heirs. A special contract, however, can be drawn up in advance to give you first rights to purchase his share of the company. To fund the purchase, you usually need a life insurance policy – as this provides immediate access to cash without using the company’s funds.
Because you receive a large death benefit amount in exchange for a small amount of premium (relative to the death benefit), it’s like buying a future savings at a discount.
Low Income Individuals
If your income is below a certain amount, then the Australian government gives you an additional incentive to contribute to your super fund. Specifically, you receive $1,000 as a “bonus” to help you contribute something to your future savings. This money could be used to pay for life insurance. With $1,000, it could buy you a substantial policy. The government maintains information about the co-contribution benefit at ato.gov.au.
Helen Akin is a retired secretary for a small insurance company. She now spends her days blogging on the Internet, mainly insurance sites. Visit this page to learn lots more about life insurance and finance.
