Misconception with life insurance leading to missed opportunities

A misunderstanding about deductions for life insurance premiums has unfortunate repercussions for SMSF customers, says a technical expert.

SMSF Alliance Director David Busoli explained that there is a misunderstanding around super held life insurance.

Mr Busoli said a deduction for term life insurance is allowed, “irrespective of whether the premium is paid from an accumulation or from retirement interest”.

“Clearly this is irrelevant if the fund is totally in retirement mode. However, when part of the fund is compounded, administrators tend to mistakenly assume that the premium must be debited from the compounding account to obtain the tax deduction. This can have unfortunate repercussions,” he warned.

He explained that the ATO considers the source of the premium payment to be indicative of the account into which the benefit is paid.

“If the accumulation account is intended to be the recipient of the proceeds, processing payment in this manner is of no concern,” he noted.

“If, however, the proceeds are intended to be received by a beneficiary of a survivor’s pension, the payment must be debited from the pension account. There is a practical reason why this may be preferable.

Mr. Busoli said that one year after the date of death, the reversionary beneficiary’s transfer balance account is adjusted to reflect the death benefit pension.

“The value of the adjustment is the balance of the annuity on the date of the death of the first beneficiary. If the life insurance proceeds were subsequently credited to the survivor’s pension, it will not affect the survivor’s beneficiary’s transfer balance account,” he said.

“Furthermore, rather than life insurance proceeds adding to the taxable component, which is the case if added to the capitalization account, they will take on the same prorated tax components as the pension.”

Miranda Brownlee

Miranda Brownlee is the Deputy Editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF industry.

Since joining the team in 2014, Miranda has been responsible for breaking some of Australia’s biggest superannuation stories and has reported extensively on technical strategy and legislative updates.
Miranda also has extensive experience in business and financial services reporting, having written for titles such as Investor Daily, ifa and Accountants Daily.

Misconception with life insurance leading to missed opportunities

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Last update: April 19, 2022

Posted: April 20, 2022

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