If the government addressed the anomalies in the tax treatment of insurance it would greatly help to close the protection gap, the Financial Planning Association has suggested.
In its recent Federal Budget submission, the FPA said the current complex and inefficient insurance tax system needs to be simplified.
Life, total and permanent disability, and income protection insurances all incur different tax treatment depending on the type of policy, how it was purchased, who purchased it and for what purpose.
“Allowing tax deductibility of insurance premiums for non-super policies will add incentive for Australians to take out life insurances, reducing our documented under-insurance problem in Australia and consequently reducing reliance on government benefits when insurable events occur,” FPA said.
The FPA has recommended – for equity and simplification – the tax be removed on all death benefit proceeds paid from superannuation regardless of the beneficiary, as it is with personally held insurances.
“As a minimum, remove the untaxed element calculations for all death benefits and additionally, remove all tax on death benefits paid to adult children.
“If taxation treatment of death benefits is to continue to relate to whether the recipient is a dependant or not, the FPA recommends a standard definition of dependant apply across all regimes – superannuation, taxation and ‘anti-detriment’ payments,” it said.
The proceeds of a death or TPD policy held outside superannuation is generally paid tax-free, so the same tax-free status should apply to policies paid inside superannuation, FPA pointed out.
“It is unlikely that any person who is not a tax specialist or financial planner would be able to calculate potential tax payable, or the strategic consequences of decisions they make in relation to where they hold these insurances, how benefits are drawn down in the event of death or TPD and to whom those benefits may be payable.
“This issue is of particular concern to the FPA and its members as the impacts of the complexity of the system make it extremely difficult for consumers to make decisions at a time when they are already confronted by very emotional and traumatic events in their lives.”
Meanwhile, new research from KPMG has found Australians are grossly underinsured for income protection, with 35% of employed Australians failing to have any form of disablement insurance, leaving a $304 billion insurance gap.
The research, commissioned by the Financial Services Council, found men and women aged 45 to 64 suffered from the greatest lack of cover.