- Ever wondered if you have to pay tax on a life insurance payout?
- Why do I need to know this?
- Why is this relevant to me now?
- Case Study
- Step 1: Looking after the kids
- What did they do?
- Step 2: Looking after aging parents
- What did they do?
- How to nominate a beneficiary to your Life Insurance and your Super fund
It depends - and that's the problem.
- If you've nominated beneficiaries who are now over 18, 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.
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 payout being made, may face having to pay tax on the money they receive.
These types of death benefit payments can be structured so they are independent of your 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.
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.
- 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
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%.
- Terry increased the amount of life insurance by 35% to offset any tax in the distant future, just in case and nominated each parent was 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 dependant upon him.
Good idea - Make a General Nomination
You can make a general beneficiary nomination and this will help the relevant Trustee making the payment decision to know your wishes.
- You need to understand a general nomination - only informs the Trustees 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 spouses, then kids in equal shares.
The people you may wish to nominate today, may not currently be financially dependent upon you today, but might be in the future.
Remember the binding nomination instructions will be assessed at the time of your future passing (as will the relevant tax liabilities of who may receive a future payout) - so consider today what to do about tax tomorrow, if you need to, just in case.