Life Insurance and Super each have one thing in common...
If you don't legally decide today, who you want to get your money tomorrow, someone else will make that decision for you - and you might not like the result.
Simply put, you can nominate in writing who you want to receive any future payout with a Beneficiary Nomination or Binding Death Nomination (depending upon what you choose).
Read in this article
Ever wondered if you have to pay tax on a life insurance payout?
It depends - and that's the problem.
- If you've nominated beneficiaries who are now over 18, and financially independent (and not your spouse), they'll probably have to face the reality of needing to pay tax on any money received from your life insurance super fund payout.
This is because of special rules about whether people are financially dependent upon you, and complex laws about who lives with you in a domestic-style relationship (and who doesn't) and why.
Why do I need to know this?
If your insurance was paid from a super fund, your nominated beneficiary of a future death benefit payout who is not financially dependent upon you, at the time of the claim payout being made, may face having to pay tax on the money they receive.
Why is this relevant to me now?
These types of death benefit payments can be structured so they are independent of the directions in your Will.
Because of this, many people with blended families now use their personal super and future life insurance payouts, as part of their overall estate planning process to make sure different family members are financially taken care of in different ways.
- They may use their Will to provide for one set of family members, and
- use their life insurance and super payout to provide for a different set of family members.
Step 1: Looking after the kids
Case Study: Terry and Jan are a blended family and each have a child, Peter aged 10 and Kerry aged 23 respectively, from past relationships.
- They want to leave $200K of their own superannuation to their own child from a previous relationship, one aged 10 and living with them, the other aged 23 and living out of home with a partner.
How will the life insurance in their super be split between the kids, if it was paid today?
If they leave $200,000 to each child, the amounts they will receive will differ;
- the adult child Kerry, living away from home independently, will face a tax bill up to 35%, while
- the minor child Peter, still living at home, will not be required to pay tax.
This is because of the special rules about who is legally a financial dependent.
What did they do?
- They increased the amount of life insurance paid from the super fund by 35%, to offset any tax in the future, just in case.
- They made a written Binding Death Nomination naming Peter and Kerry as beneficiaries of their Life and Super death benefit payouts, just to be clear
- And, set a reminder to update and re-confirm the written Binding Death Nomination every three years
Step 2: Looking after aging parents
Terry has two independent aging parents who live alone, he wants to nominate as beneficiaries to a separate life insurance policy, should he unexpectedly pass away before they do.
How will the life insurance in their super be taxed, if it was paid today?
As Terry’s parents are currently healthy, financially independent and not living with Terry, they will face a tax bill up to 35%.
What did they do?
- Terry increased the amount of life insurance by 35% to offset any tax in the distant future, just in case and nominated each parent to receive 50% of the balance of any payout.
- Terry made a written Binding Death Nomination and named his two parents as the beneficiaries of his Life and Super death payouts.
- And, Terry set a reminder to update and re-confirm the written Binding Death Nomination every three years and consider reducing the amount of insurance once his parents become financially dependent upon him.
How to nominate a beneficiary to your Life Insurance and your Super fund
Good idea - Make a General Nomination
You can make a general beneficiary nomination and this will help the relevant Trustee make the payment decision to know your wishes.
- You need to understand a general nomination - only informs the Trustee's decision but does not ‘bind’ them to follow your expressed wishes.
Better idea - Make a Binding Nomination
Do you have to make a binding beneficiary nomination? No. You’re under no obligation to do so.
- While you’re not under any obligation to do so, a Binding Nomination does ‘bind’ the decision-making of the Trustee to follow your written instructions.
How long does this last for?
This has to be renewed every three years.
If I make a Binding Nomination, can I change it?
Yes, you can. Over time most situations and relationships change so it's important you ensure your binding death nomination (BDN) remains current at all times.
If you want to amend or change your written nomination, the Life or Super fund Trustee will usually require the original ink on paper signatures to be supplied to them.
Why do I have to re-nominated every Three years?
Super laws are very complex and say binding death nominations are only valid for three years. This is to ensure your nominations stay up-to-date with your current circumstances, so you’ll need to re-confirm your nominations every three years in order for it to remain valid.
If after three years you don’t make another binding death nomination, (or re-confirm your original nominations), your original instructions will no longer be binding upon the trustee of the Life or Super funds making the payout and will make the payout to your spouse, then kids in equal shares.
Pro Tip: The people you may wish to nominate today, may not currently be financially dependent upon you today, but might be in the future.
Warning: This is a complex area of law and deserving of careful financial advice. The taxation of death benefits is complex and we strongly recommend you discuss the implications with us.
Call us today on 1300 137 403 or email us here for a no-obligation private chat about your situation.
Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses. He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn. Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.
