Life insurance: Things to consider when going solo
Taking the leap from a full-time job to running a solo or small business is a life-changing event, so it makes sense to get your life insurance in order when you do.
When transitioning from full-time employment to running your own business there is a multitude of decisions that need to be made. You need to consider your trading structures and equipment purchases, not to mention getting those first vital clients in the front door to get the cash flow flowing.
With all this activity it is often easy to forget what needs to be considered with your superannuation and life insurance needs. You see, when leaving an employer, some superannuation plans will automatically cancel your life insurance after six months. Depending on your debt load and family commitments, this would not be an ideal situation if something were to go wrong.
Most superannuation funds will provide “automatic acceptance limits” where by being an employee and therefore a superannuation member of your employer’s default superannuation plan, a standard level for personal insurance coverage is provided. This generally covers the employee for death, total and permanent disability, and sometimes income protection.
"When leaving an employer, some superannuation plans will automatically cancel your life insurance after six months."
The levels of cover are often based on the member’s age and are reduced as we get older. It does not take into account your personal situation, such as debt levels or the number of financial dependents. So, even if your fund doesn’t cancel your cover, the levels of cover may not even be appropriate.
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Owning your life insurance through your superannuation fund may not be appropriate either. There are a number of tax outcomes that need to be considered. If you pass away without any financial dependents and the superannuation insurance benefit is paid to a sibling or parent, there is potential for tax to be applied to the insurance amount of up to 31.5 per cent.
Again, owning your income protection policy through superannuation may not provide the best tax outcomes. Income protection premiums are generally tax deductible, so if you’re on the highest marginal tax rate of 46.5 per cent including Medicare, the deduction is far more valuable in your name than in superannuation where the maximum tax rate is 15 per cent.
When considering your insurance needs, the initial cost of insurance may be a real turn-off when your business is just starting out and cash flow has not yet ramped up. This is where your current superannuation benefits can provide the funding to reduce those monthly expenses that keep multiplying.
So, as you write your to-do list, remember your superannuation and insurance can potentially become even more important once you’re self employed. As always, seek professional advice to ensure your personal situation is catered for.
Have you sorted out your life insurance since becoming a soloist?