Want good insurance cover? Best speak with the experts...

Written on the 22 December 2011 by TAL & The Australian

It’s easy to underestimate the importance of your regular income – or even take it for granted. A recent article by David Glen, Tax Counsel at TAL (formerly Tower Australia Ltd) published in The Australian highlights the importance of seeking expert advice in protecting your income. Macmillans Waller Fry are able to assist you with seeking appropriate insurance tailored to your circumstances with proper consideration of the tax consequences. For more information on how to protect and manage your wealth, contact Warren Jeffries.

Warren is an authorised representative for Madison Financial Group Pty Ltd.

Best speak with the experts if you want good insurance cover

We all face the risk of a debilitating, if temporary, loss of our income.

AS the Australian tax and regulatory environments grow in complexity, the notion of simplified or do-it-yourself life insurance advice for the self-employed or small business becomes more illusory.

The need for good life insurance advice is vital, especially when all of us face the possibility of a temporary loss of income.

Sound advice when dealing with the complexities of income protection and business expense insurance will save considerable heartache, stress and of course dollars.

The most important asset we have is our ability to work and to generate income. If there is a temporary interruption in income, through illness or injury, our lifestyle is threatened and there is the risk this setback could destroy us financially.

In short, our financial commitments continue.

This is the compelling case for income protection life insurance cover to compensate us when we are without cash flow because of an injury. It pays the mortgage, keeps the cars running, the kids at school and puts food in the tables.

However the range and types of income protection cover on offer are enormous, and the best choice really depends on each individuals circumstances. Therefore a good life insurance adviser will add value, promoting the needs for protection and matching that need with the most appropriate income protection product.

Income protection premiums are generally deductible both inside and outside so that after-tax cost is generally the same. The choice is therefore not tax driven.

Income protection insurance in super has the cash flow advantage of premiums being financed from accumulated balances.

However, income protection insurance in superannuation has its downsides. Inside super income protection insurance will erode retirement savings and premiums will also count towards concessional (tax deductible) contribution caps.

A cashed up 50-something professional needs income protection cover, but the infidicual may also be concentrating on building up superannuation savings in the years leading up to retirement.

This individual may prefer income protection cover outside superannuation for the reason that the cost of the cover is generally tax deductible, the contributions caps are not eroded, and the maximum amount can be directed to retirement savings.

Good advice is probably needed to navigate around the opaque and complex superannuation rules when determining the appropriate holding structure for life insurance.
There are, however, limitations with income protection cover when it comes to the self employed and small business operator.

Income protection cover provides funding to maintain an individuals and family lifestyles during periods of temporary illness of disability, but it can be limited to 75 percent of the income lost, and there can also be long waiting periods before claims get paid.

For some, this protection may not be the fill answer, especially when other expenses keep going.
Self employed and small business operators also need to consider the survival of their business during a temporary incapacity.

Fixed costs such as rentals and lead payments continue and the operator’s lifestyle could be seriously compromised if compensation is limited.

Business expense insurance covers the fixed costs of the business during the proprietor’s temporary incapacity, usually for a period of twelve months.

It is, however, not the be-all panacea. It is generally not appropriate for a business in which income can be generated by staff during the proprietor’s illnesses, and where that income flow is sufficient to cover fixed expenses. This is probably where you need good life insurance advice.

Good advice can protect you from some of the stresses of the Australian taxation station system.

In a case called Watson v Deputy Commissioner of Taxation, the taxpayer was a claimant under an income protection policy.

He sought to deduct business losses, incurred during his incapacity, against the income protection claim proceeds.

The Federal Court held that the proceeds of an income protection policy do not constitute business income, and therefore the claimant’s business expenses may not be offset against this income. The loss arising from the business expenses is carried forward, and may be offset against business income in future years.

For example, assume A receives income protection proceeds of $120,000 a year and he has no business income in that year, but has incurred business expenses of $30,000.

Here, A’s taxable income for the year is $120,000.

The $30,000 in business expenses may be carried forward to future years and offset against any business income in those years (assuming A survives the tax liability, and is still in business).

Now B followed an advisor recommendation and obtained business expense cover of $30,000 in addition to the income protection cover. B has business income of $30,000, being the proceeds of the business expense policy.

The business expenses are deductible against this income. This leaves B with taxable income of $120,000 for the year, which matches his income in economic terms.

Our tax and regulatory system is complex and simplification is largely an illusion.

Good advice is therefore essential if you are to get the best out of what is on offer.

Author: TAL & The Australian




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