End of financial year insurance planning

The end of the financial year is an opportune time to review a client’s financial situation. The main strategies involving insurance are outlined below.

Pre-pay income protection premiums

Up to 12 months' income protection premiums can be pre-paid, allowing a tax deduction to be claimed in this financial year.

Example:

Sophie earns $100,000 per annum and owns an income protection insurance policy personally, at a cost of $2,000 per annum. In addition to the premium already paid this year ($1,600), Sophie pre-pays the next 12 months premium, thereby saving $780 of tax this year.

== ==	Pre-paid premiums	Non pre-paid premiums
Salary	$100,000	$100,000
Tax deduction	$3,600	$1,600
Taxable income	$96,400	$98,400
Tax payable (including Medicare levy)	$25,543	$26,323
Additional tax saving	$780	n/a

Review insurance structure

It is important to keep abreast of the various options available in the market, to ensure that the best outcome is achieved for each client.

For example, where a comprehensive income protection policy is required, but disposable income is inadequate, a super-linking arrangement can be used that allows most of the premium to be paid from superannuation. This will ensure full coverage with minimal impact on take-home pay.

Or where super restricts the policies available – such as trauma or own occupation TPD – these can be owned outside super and linked to policies inside super. This is known as ‘flexi-linking’. Total premium will be lower than standalone policies, with as much as possible paid from super.

Review method of funding insurance

The portion of premium that is paid from super can be funded in a number of ways, such as through contributions or rollovers, or the account balance. However, it is only contributions that are affected by the end of the financial year. The types of contributions that should be made before 1 July 2015, to ensure the associated benefits are received next year, are outlined below.

The type of contribution that provides the largest benefit will depend on each client’s 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 would be required. However, middle- to high-income earners who are ineligible for other benefits can reduce their taxable income through concessional contributions (that being salary sacrifice or personal deductible contributions).

The end of the financial year is an appropriate time to decide which contribution type is suitable, since each client will have a much clearer picture of what their total income will be for the year. For example, a client who is both partially employed and self-employed may not know whether they will qualify under the 10 per cent rule¹ as eligible to claim a tax deduction on personal super contributions until the end of the year.

The table below summarises the type of contributions that need to be made before 1 July 2015 in order to receive the relevant benefit next financial year.

Type of contribution	Benefit	Contribution level
Non-concessional contribution	Co-contribution of up to $500 (for low income earners)	Up to $1,000, but will depend on income
Spouse contribution (non-concessional)	Spouse contribution offset of up to $540 for the contributing spouse	Up to $3,000, but will depend on income level of receiving spouse
Salary sacrifice (concessional)	Reduction in assessable income	Up to the relevant concessional contribution limit² less Super Guarantee
Personal deductible contributions (concessional)	Reduction in taxable income	Up to the relevant concessional contribution limit2

There is also the option of splitting concessional contributions from one spouse to another (if eligible) to fund premiums. Up to 85 per cent of concessional contributions made in the current financial year can be split to a spouse next year³. Therefore, these contributions should also be made before 1 July 2015.

Review level of cover

The end of the financial year is also a good time to review the level of cover that each client has since their circumstances may have changed. For example, the needs of a single client will change if they marry, and again, if they have children.

The 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 (e.g. 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.

Rachel Leong is a BT technical product manager of life insurance

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1) A person who earns less than 10 per cent of total income as an employee may be eligible to claim a tax deduction for personal contributions to super. Total income is assessable income, reportable fringe benefits and reportable employer super contributions.

2) If a premium rebate is received on concessional contributions that is larger than the associated excess concessional contributions charge, exceeding the concessional contribution limit for the purpose of owning insurance inside super may still be a valid strategy.

3) Concessional contributions may be split in the same financial year if the entire benefit is to be rolled over, transferred or cashed before the end of that financial year.