Lifebroker: How Death Cover Provides Tax Free Benefits For Your Family
December 22, 2011 (PRLEAP.COM) Business NewsImagine that you've received some bad news from the doctor. At age 40, you have only a few years left to live. Naturally, you're concerned about how you're going to provide for your family after you've gone. You currently make $70,000 a year and have $25,000 in HECS debt. You are part of a superannuation insurance fund. You have income protection insurance that provides up to $950 a month. Your current super fund insurance is supposed to provide $500,000 in the event of your death due to a terminal illness, but you're worried that this lump sum payment will be subject to heavy taxation. What should you do?
In this situation, it's best to make sure that you understand each of your options. Superannuation lump sum payouts are subject to all sorts of tricky taxation policies. Payouts can have a tax-free component as well as what is known as an "untaxed element." This untaxed element tends to be greater the younger you are. At age 40, your beneficiaries will likely receive far less from your superannuation insurance lump sum payment than they would if you were over the age of 65. Luckily, HECS debt payments are owed only as long as you are alive. After your death, the remainder is generally forgiven.
As a result, the best way to ensure that your family receives the money they need is to increase your overall monthly income insurance protection policy. Having a larger monthly income payout policy will not compromise payments from the superannuation fund as long as the payments do not exceed 75 percent of your monthly salary. If you are currently making $70,000 a year, your average monthly salary is about $5,800 a month. By increasing your income protection plan to have monthly payouts of $4,000, you will be able to comfortably provide for your family in the event of your death without the additional complication of taxation.
What makes income protection plans particularly attractive is that their tax structure differs radically from superannuation fund insurance payouts. As long as the premiums for the income protection plan have been paid with money that has already been taxed, the benefits themselves are tax-free. By shifting your funds to a large death cover/income protection policy, your family will be provided for without any complications.