Both self-employed business owners and employees who are eligible to claim a tax deduction for superannuation contributions, or who can salary sacrifice, should consider having their life insurance policy owned by their superannuation fund.
This is attractive as the superannuation fund receives a tax deduction for the life insurance policy costs. In contrast, life insurance policy costs paid by an individual are non- deductible.
Upon death, the proceeds of the life insurance policy are paid directly to the superannuation fund (as the policy owner). The amount is allocated to the member’s account as a taxable component.
The ideal is to have the death benefit paid to a death benefit dependent as then the lump sum is tax free.
A deceased person has the following death benefit dependents:
- A spouse.
- Child under the age of 18.
- A person who is financially dependent e.g. possibly grandchildren, adult children, etc.
- A person with whom the deceased had an ‘interdependency relationship’ e.g. close friends sharing a house.
If the death benefit is paid to adult children the lump sum is taxed at 17%.