Ask the Expert: When should I ditch insurance within super?
Question 1
Insurance within super – at what stage should you discontinue it? As you get towards retirement age, premiums get dearer and your fund balance increases to the extent that a death benefit is not needed.
This can be a tricky question and there is no black and white answer.
Insurance within super provides you with at least some cover should you die or become totally or temporarily disabled.
You make some good points though. Premiums do get a lot more expensive when you are older. Especially from the mid-50s onwards. This is, of course, due to the fact you are far more likely to make a claim as you get older.
Depending on your fund and the type of cover, most super funds stop your policy between mid-60s and age 70.
You should make a conscious decision about whether you want to keep your policy, and if yes, the amount of cover.
Some things to consider when making your decision:
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- If you die or become disabled, do you (or your beneficiaries) have enough assets to get by, i.e. Can you afford to ‘self-insure’?
- How much are your premiums? Do they represent a large percentage of your contributions to super?
- How is your super balance tracking? Are you confident of meeting your retirement goals?
- Do you still have debts and other obligations that need to be met?
It’s a trade-off between being fully covered versus building your super to have a nice retirement. The answer may not be all or nothing, you could decide to just dial back some of your cover.
Many super funds can provide you with personal advice about the insurance that you hold with them. The advice is often covered by your membership fee and no additional fee would be payable. You should consider speaking with your fund about this.
Question 2
I’m 62 years old with a part-time job earning around $25,000 a year. I get a supplement from Jobseeker and have a pensioner card.
I’m looking to downsize soon and with some of the extra funds I would like to pay off both my daughters’ HECS fees. This would be around $40,000-$45,000. Is there a way of doing this that won’t penalise any of us tax-wise or my Jobseeker payment? Or would it be better to just stick to gifting them a smaller amount over a few years?
There is no negative tax consequence in what you are proposing.
However, Centrelink would consider this gifting and it would be caught under their deprivation rules.
Deprivation arises where a person disposes (gifts), destroys or diminishes the value of an asset or income without receiving adequate financial consideration.
Under social security legislation, amounts exceeding the ‘disposal-free areas’ are treated as a deprived asset. They are then assessed for five years from the date of the relevant disposal.
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The disposal free areas are $10,000 in a financial year or $30,000 over any rolling five-year financial period. Anything above that is still considered an asset that is owned by you for five years.
Therefore, you can pay off $45,000 in your daughters’ HECS debt. You would not see any reduction in your benefits, but $35,000 would still be considered an asset owned by you for the next five years. You may even receive a small increase in payments from Centrelink because you have $10,000 less.
The main takeaway is don’t leave yourself short. You will no longer have access to these funds and would only receive a minimal increase in support payments.
Question 3
When you make a downsizer contribution into a super account, is it classed as non-concessional and forms part of the tax-free component? If so, upon death, do my non-dependent children claim my super tax-free?
‘Down-sizer super’ contributions do not count under the concessional (pre-tax) or non-concessional (post-tax) caps.
They have their own category and cap, which is $300,000. If you have a spouse, then each partner can make up to $300,000 in down-sizer contributions from the sale of one residence.
These contributions go into the ‘tax-free’ component of your super. Therefore, no tax would be payable when paid out as a death benefit, regardless of who it is paid to.
Other eligibility criteria are shown below:
- You have reached the eligible age of 55 (and there is no maximum age limit) at the time you make a down-sizer contribution
- Your home was owned by you or your spouse for 10 years or more before the sale
- Your home is in Australia and is not a caravan, houseboat, or other mobile home
- The proceeds from the sale of the home are either exempt or partially exempt from capital gains tax. i.e. it must have been your primary residence for at least part of the ownership period
- You make your down-sizer contribution within 90 days of receiving the proceeds of sale (usually at the date of settlement)
- You have not previously made a down-sizer contribution to your super from the sale of another home or from the part-sale of your home
- You provide your super fund with the correct form.
Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
