Q: I have a life insurance policy owned by my SMSF worth approximately $1.5 million. Currently there is only about $80,000 accumulated in the fund. I am 55 years old. If I die tomorrow is my wife able access an income stream from the fund tax-free? For instance, upon my death if this $1.5 million was left in the fund generating 5%, will my wife receive the entire $100k per year income without paying tax?
We are an information site rather than an advisory site, so we cannot provide specific advice on the tax implications of an insurance payout upon death, but we can provide you with general information on the question that you ask.
Super alert! Since 1 July 2017, there is now a limit on the amount of super a person can transfer to the retirement phase, and these new rules will also affect superannuation death benefits, including insurance payouts. For more information on the $1.6 million pension transfer balance cap and how it affects death benefits, see SuperGuide article Superannuation death benefits and the $1.6 million transfer balance cap .
Generally speaking, if an SMSF holds a life insurance policy that pays a death benefit pension to a spouse, and the deceased and the beneficiary are both under the age of 60, then the surviving spouse receives pension benefits that will be subject to marginal tax rates, although the surviving spouse will receive a 15% tax offset on the taxable component of the super pension. For more information on the tax rates on superannuation death benefits, see SuperGuide articles Super for beginners, part 15: Super tax – as easy as 1-2-3 and Superannuation death benefits and the $1.6 million transfer balance cap .
If the surviving spouse received a lump sum insurance payment (rather than a pension), then the payment would be tax-free regardless of the age of either the deceased or the beneficiary, provided the amount is paid to a death benefits dependant (dependant under the tax laws), such as a spouse. Although receiving a tax-free lump sum sounds enticing, the money is then outside the super system and any earnings on that payout will then be subject to the full income tax system.
We strongly suggest you chat to a financial adviser, or an accountant for the specific tax implications of such an outcome.
Note: If a life insurance benefit from a super fund is paid to a non-dependant under the tax laws (even though a dependant under the super laws), such as a financially independent adult child, then tax is often payable. For more information on the different type of dependants and non-dependants, see SuperGuide articles Superannuation death benefits: Who receives super payments, and how much tax is paid? and Superannuation death benefits: Dear Dad, Tax for everything.
For more information about superannuation death benefits
For more information about death benefits, and the tax implications, the following SuperGuide articles may also assist you:
- Superannuation death benefits: Who receives super payments, and how much tax is paid?
- Retiring before the age of 60: the tax deal
- Superannuation death benefits: Dear Dad, Tax for everything
- Superannuation death benefits: Beware the dastardly death tax, and retirement cap
- Retirement phase: A super guide to the $1.6 million transfer balance cap
- Death benefits: Is a binding DBN different from a reversionary pension?
- SMSF pension earnings remain tax-free after death
More articles about insurance and superannuation
For more information on superannuation and insurance, see the following SuperGuide articles:
- Life insurance and super: 10 facts you should know
- Comparing super funds: Top 20 cheapest funds for life insurance
- Comparing super funds: Top 20 cheapest funds for income protection insurance
- Cost shock: Paying too much for insurance in your super fund?
- Comparing funds: Which super funds offer the cheapest insurance?
- Four reasons to buy insurance inside your super fund
- Life insurance: One in five parents will die early, or be too sick to work
- SMSFs must consider life insurance needs
- SMSFs: Can I transfer my life insurance to my DIY super fund?
- SMSFs: Trauma insurance is not OK