Income protection insurance offers a regular monthly income when you’re unable to work due to sickness or accidents. Managing this effectively is crucial for trust accounting and overall financial stability.
There are several distinctions between holding income protection within superannuation or outside of it. Understanding these differences is essential for effective SMSF administration.
Generally, individuals can claim a tax deduction for the premiums paid on an income protection policy to reduce the effective cost of the policy. However, the tax deduction amount will depend on whether the policy is owned either inside or outside of super:
Income protection owned outside of super is generally tax deductible against the personal income of an individual and a tax credit is received at the individuals marginal rate of tax (up to a maximum limit of 45%).
When income protection is held within superannuation, the super fund can claim a tax deduction, but it’s limited to a 15% tax credit. This has implications for corporate compliance and overall financial planning.
In addition,
Policies held outside of super typically offer more comprehensive coverage, including ‘plus’ or ‘premier’ features. This is particularly beneficial for those managing company trusts or seeking detailed trust administration solutions, whereas policies inside of super provide only standard basic coverage.
Some examples of features that are available outside of super, and not in a basic coverage inside super are:
- Child Care Benefit
- Child’s Critical Illness Benefit
- Rehabilitation Benefit
- Overseas Assistance Benefit
- Accommodation and Transport Benefit
- Involuntary Unemployment Benefit
- Job Security Benefit
- Return to Work Benefit
- Cover Continuation Benefit
- Guaranteed Future Insurability Benefit
Holding income protection within superannuation can decrease an individual’s retirement benefits, as premiums are deducted from the super balance. Utilizing trust accounting software can help monitor and manage these deductions effectively.
Another difference is whether an individual wants an agreed value policy or an indemnity policy:
Outside superannuation, policies can be structured as either agreed value or indemnity. Within super, only indemnity options are available. For legal professionals, selecting the appropriate structure is vital, and legal trust accounting software can assist in evaluating these options.
However if inside super, there is only the option of indemnity.
With superannuation-held indemnity contracts, benefit payments are based on earnings from the 12 months preceding temporary incapacity. Real estate professionals should consider how real estate trust accounting software can aid in tracking these earnings accurately, meaning the insurer will pay a benefit that is the lesser of the sum insured or the personal income earned in the 12 months prior to a claim (which is not good news if there is a reduction in income prior to claiming).
An agreed value claim payment is based on the individual’s income at time of application and will be guaranteed to be paid at claim, even if their income has reduced.
These points highlight key differences between policy ownership structures. For those involved in managing a trust business account, seeking personal advice is recommended to navigate superannuation, insurance products, and financial decisions effectively.
SMSF Life Insurance Reviews
The information SMSF Life Insurance Reviews provides in its blogs, software and on its websites is of a general nature only and does not take into account your (or your clients’) personal circumstances.
