Cinderella act In super life insurance finally goes to the ball

Some major marketing opportunities have opened themselves up in the wake of the Government’s proposed changes to superannuation announced in the 2006 Federal Budget.

While the changes are proposed at this stage, it seems likely the broad thrust of the ideas may be adopted — it is just the fine print that will need to be watched and is subject to industry discussion.

However, one area where it seems there may not be much change and where an opportunity lies is in the area of in super life insurance protection. In super life has been often overlooked in the past due to taxation complexities, but it now offers added attraction.

Currently, in super life is measured against the deceased’s pension reasonable benefits limit (RBL) if paid as a lump sum in the unfortunate case of death.

Now it is proposed that RBLs are to go, effective from July 1, 2007.

For in super death cover, this means lump sums will be tax free regardless of the amount of death benefit paid to a dependant. Without RBLs, there will be no payment of any excessive tax on the combined super/insurance payout.

For financial advisers, this means death benefits will be tax free (if paid as a lump sum to dependants), so some insured amounts can be significantly increased. Currently, strategies are used to minimise the possible tax consequences for beneficiaries by paying benefits that would be excessive as a pension. This can deliver tax benefits to beneficiaries. Children and spouses (who both currently receive different taxation treatment) can currently benefit from this strategy, although care needs to be exercised to ensure it is appropriate for the situation. These current strategies will need to be evaluated, as they may not be needed in situations where the entire benefit can be paid tax free as a lump sum to a dependant.

Don’t forget why in super life is attractive to begin with — people may benefit from salary sacrifice arrangements, the government co-contribution scheme, tax deductions and the spouse contribution tax offset. Removing the tax on lump sum death benefits to dependants merely makes it more attractive.

With respect to in super coverage for total and permanent disablement cover (TPD), there is not much proposed to change, although the removal of RBLs is again an opportunity, and does have a flow-on effect. There will be no excessive benefits tax to pay if RBLs are abolished, but the sum received may still be subject to other tax requirements.

However, reduced personal tax rates to come into effect from July 1, 2006, are of assistance here.

If RBLs go, there will be no need to worry about discounted RBLs for people under 55, making the payment of TPD even easier.

If a person also takes the lump sum from age 60 onwards it will be tax free — if they are less than 60 they may be taxed (two new components may exist — exempt and taxable).

However, the big change that may relate to insurance in super is that any pre-July 1983 component will be an exempt component and not taxed (currently, 5 per cent is taxed at the client’s marginal tax rate) if the client is under 60.

For the self-employed, there are other issues to be explored.

It is proposed that self-employed people may be eligible for the co-contribution as the eligibility rule about employment is proposed to change.

Currently, a self-employed person does not meet the test of earning at least 10 per cent of total income from eligible employment.

Under the proposed changes, a new rule is suggested where a person must earn 10 per cent or more of their income from carrying on a business, eligible employment or a combination of both.

The income will therefore be measured for self-employed people as assessable income, plus reportable fringe benefits, minus any expenses incurred in carrying on a business.

This may mean they could receive the government co-contribution when they structure insurance in super.

Alternatively, they could still claim a deduction for super contributions, with it now proposed that from July 1, 2007, all contributions be deductible.

The Government has circulated a 90 plus page document on its proposed superannuation changes, with the aim to make the system simpler. This is clearly laudable.

However, the risk is that as time goes by unintended consequences might arise, leading to complicated rules being developed. Either way, there are still plenty of opportunities for financial advisers to play a key role in the industry. In super life can be one great opportunity.