Life Insurance
Life - eg. Permanent, Term life (temporary), Total and Permanent Disability (TPD), Trauma, Income Protection. The beneficiary of a life insurance contract is usually the policy owner. Upon the death of the life insured, the death benefit will be payable to the owner of the policy. If the policy owner is also the life insured, any death benefit will be paid to the deceased estate and distributed according to the terms of the will.
Most insurance providers will allow policy owners to nominate a beneficiary which would be a third party. Any death benefit that becomes payable under the contract of insurance in this case is payable to the nominated beneficiary, even though they are not a party to the contract, and the money will not form part of the estate of the person whose life is insured (section 48A, Div 2, Insurance Contracts Act).
Most insurers limit the nomination facility to death benefits only, not living benefits such as trauma or TPD. If the nominated beneficiary pre-deceases the life insured, then on the death of the life insured the benefit will be payable to the owner of the policy tax free. If the policy owner is also the life insured, any death benefit will be paid to the deceased estate and distributed according to the terms of the will. Not all companies allow a nomination of beneficiaries on every contract they offer.
Permanent Insurance - they have an investment component which is paid out upon death or maturity date of the policy. Two types - Whole of Life Policies and Endowment Policies.
Whole of Life - maturity date is set to out live the insured eg. 95yrs, generally designed to payout upon death rather than maturity.
Endowment - same as 'Whole of Life' but the maturity date could be set for specific term eg. 10yrs or to mature at a certain age, eg. 65yrs on retirement (commonly used by superannuation policies).
Permanent insurance has the investment component which has a surrender or cash value. If the policy holder cashes in or surrenders (cancels) the policy, the insurance cover ceases and the accrued investment monies are repaid to the policy owner. Whilst the policy is in force the holder could 'borrow' against the surrender value.
Term Life (temporary) Insurance - payout upon death within a specified term. Annual premiums containing no investment component. When the policy is cancelled or lapses there is no surrender value.
Total and Permanent Disablity (TPD) Insurance - often bundled with Term Life or Trauma insurance. Also known as a rider benefit. Normally a lump sum payout when life insured meets the definition of being totally and permanently disabled. Read the policy details carefully for what you get.
Trauma Insurance - surviving a 'critical illness'. May also be a rider with Term Life policy or taken standalone. Serious illness eg. stroke, heart attack, etc. also some 'dread diseases'. A lump sum is paid upon the occurence of an insured event.
Income Protection or Disability Insurance - provides policy owner with a replacment income after a specified waiting period eg. six months. Maximum benefit is normally 75% of the insured's gross earnings. Premiums payable are tax deductible, but the proceeds are taxed.
Other insurances:
Key Person Insurance - if a business heavily depends on one individual then insuring that individual may keep the business afloat if that person were unable to complete their normal role/s.
Life Insurance Bonds - usually single premium policies that are either unit linked or capital guaranteed. An insurance or investment bond is a life insurance policy under the Life Insurance Act and the Insurance Contracts Act. It is usually an "unbundled" investment only contract and, therefore, the surrender value equals the account balance. Some insurance bonds have a small amount of life cover which would be paid in addition to the surrender value, such as 0.1% of the account value or $2,500. A bond usually involves a once only premium payment (or investment), but some insurance companies allow regular "top-ups" once the initial premium has been paid.
The investment returns on an insurance bond are taxed in the hands of the insurance company, the earnings are reported net of this tax. Insurance bond investment returns, or profits, are considered tax paid in the hands of the bondholder after year 10 and prior to that a stepped scale applies. Any profit that is assessable is subject to a tax rebate. A death benefit from an insurance bond is generally tax free.
An investor in an insurance bond can select from a wide range of investment options from capital guaranteed and cash through to international shares or growth funds.
1. A lower rate of tax is paid on the insurance bond earnings where the investor's marginal tax rate is higher than 30%. If held to maturity (a period of 10 years), all earnings are tax paid.
2. Switching between investment options (to take advantage of market fluctuations) will not constitute a CGT event for the individual and therefore no tax liability arises for the investor at this time. This has significant tax advantages where a high income earner can realise capital gains arising from being in a market linked investment option with no tax liability.
3. Whilst in the bond, earnings are not included as assessable income for the investor. This helps to reduce the Medicare levy and in some cases may help retain taxable income related rebates (such as the low income rebate) or qualify for Family Tax Assistance.
4. In theory, if the investor has no other investments or taxable income apart from an Insurance Bond, the client will not have to lodge a tax return.
Terminology:
Insurance Company - receives premiums for taking on risk.
Actuary - calculates the risk of a particular event occuring.
Underwriting - evaluates risk involved in individual cases. The underwriter decides on behalf of the insurer whether or not to accept the risk being proposed. Proposals generally classified as 'standard risk', 'sub-standard risk', 'defer or decline'. Sub-standard risks may involve higher premiums being paid known as 'loading'.