|
National Technical Manager
David Glen
|
Insurance policy ownership is the vital yeast in the mix of advice ingredients. Too often, this yeast has been omitted leaving the client with a stodgy end product of limited value and the potential of causing acute indigestion. The right mix of policy ownership advice in the advice ingredients can deliver an outcome which not only adds value in a tax and legal context, but also gives the client’s family enormous economic comfort at the stressful time of making a death or disability claim under the policy.
Basic advice ownership mantra
The first step is to familiarize yourself with the basic rules of insurance policy ownership to ensure the appropriate ownership choice at the outset. These basic insurance policy ownership rules are the following:
- Superannuation Policies
If the policy is held within superannuation, the owner of the policy is the trustee of the superannuation fund. The trustee has fiduciary duties under Common Law and the Superannuation Industry Supervision (“SIS”) Rules. This means that this ownership model is inflexible but gives the protections and tax advantages offered by the superannuation environment.
Tax advantages under the superannuation ownership model include the ability to fund an insurance in superannuation arrangement by tax deductible superannuation contributions.
Tax disadvantages include a complex claims process. Claims proceeds are paid by the insurer to the superannuation fund trustee as policy owner who then has to determine whether the benefit can be paid to the member under the Conditions of Release contained in the SIS Rules.
- Outside superannuation
This ownership model offers flexibility. The policy owner can be a natural person, corporation, or trustee. This means that the claims process is a simple single stage process. The policy owner simply receives the claim proceeds.
The advice in this case should consider the desired ultimate recipient of the claim proceeds. If the policy owner is not the ultimate recipient of the claim proceeds, the advice should consider how the claim proceeds will move from the policy owner to the desired recipient and any risks associated with this process.
The claim proceeds for lump sum benefits under this ownership model are generally capital in nature. However, this is not the end of the tax enquiry. It is important to ensure that the claims proceeds escape the capital gains tax (“CGT”) net by fitting into the relevant CGT exemptions. The claim proceeds are exempt from CGT if paid to the original owner of the policy, or if the recipient of the claim proceeds did not give consideration for the rights under the policy.
If CGT is payable, the strategy is not necessarily invalid. The essential question is whether the CGT liability is inevitable. If it is inevitable, the adviser should consider the impact of grossing up the required insurance amount by the tax payable.
Changing Policy Ownership
Policy ownership can be assigned subject to formalities prescribed by the Life Insurance Act 1995. It is important to ensure that any assignment complies with these statutory formalities such as the requirement to assign ownership in writing signed by both parties. Many life insurers impose assignment formalities in addition to the statutory minima. It is therefore important to check the requirements of the relevant life insurer before embarking on the assignment process.
A change of policy ownership may give rise to a tax liability in the hands of the assignor at date of assignment. It is also important to consider the position of the assignee at date of claim. These considerations include the tax position of the assignee in the event of a claim under the policy.
An assignee who is not the original owner of the policy and who gives consideration for the assignment faces a potential CGT liability at point of claim. If the recipient of the claim proceeds is not the original policy owner, the claim proceeds will only be exempt if the recipient did not give consideration for the rights to receive payment under the policy. Consideration is a wide concept and is not limited to monetary consideration. It can include non-monetary receipts or benefits such as assuming certain obligations as part of the assignment.
For example, client ‘A’ has a policy on their life, but can no longer pay the premiums. Client ‘B’ agrees to purchase A’s rights under the policy for a specified sum and A assigns ownership in the policy to B. Client B continues to pay the premiums to keep the policy in force. On A’s death, B receives the claim proceeds due under the policy. Assuming that client B holds the policy as a capital asset, they will be required to include any claim proceeds paid to them in their assessable income. Client B is not the original owner of the policy and he has given consideration for the rights under the policy being the payment to client A pursuant to the assignment.
Assignments from personal ownership to superannuation ownership contravene the SIS provisions. The SIS provisions broadly prohibit the trustee of a superannuation fund from acquiring assets from members of that superannuation fund. It is important to remember that an insurance policy is an incorporeal asset being a bundle of rights which give the policy owner certain specified benefits such as the right to claim on the happening of an insured event. There are specified exceptions to this prohibition, but insurance policies do not fit within these exceptions.
Cancellation and re-issue
Ownership transfer issues may be eliminated by having the policy cancelled and a new policy issued in its stead without the formalities of underwriting, provided that the life insurer is prepared to issue a replacement policy on this basis.
Under this approach the slate is wiped clean, and a new policy issued without any of the baggage associated with the cancelled policy. In the case of an ordinary policy, the policy owner of the new policy issued is the original owner of the policy and would under the normal CGT rules receive any claim proceeds free of CGT.
Life insurers only allow cancellation and re-issue without underwriting in limited circumstances. It is therefore important to ascertain the precise terms of the insurer’s rules on cancellation and re-issue in relation to the policy in question before committing to a new ownership strategy.
Policy ownership best practice
The following processes will deliver the requisite ownership yeast and avoid the stodgy glutinous mix of nasty surprises and disputes amongst family members. These processes include the following:
- Identify the owner and beneficiary of each policy
- Identify the recipients of any claim proceeds
- Map the flow of premium payments
- Map the flow of claims proceeds
- Are the outcomes per the mapping the desired outcomes?
- Is confirming legal/tax advice necessary?
Way forward
We are now in the era of personalised advice tailored to meet the client’s prioritised goals, and is also appropriate to the client’s circumstances. Ignoring policy ownership issues not only increases the risk of contravention of the onerous requirements of Corporations Act and the Code of Ethics, but also denies the opportunity to the adviser to add value by creating a robust solution based on the client’s priorities and needs. Advisers should be viewing this situation as an opportunity for quality advice to thrive, rather than a heavy compliance burden.
This information is general in nature only and has been prepared for the education of financial advisers. It is not intended to be legal, taxation or financial advice to any person. TAL Life Limited, its subsidiaries and its representatives have not taken into consideration any individual’s personal circumstances, financial needs or objectives in preparing it. If any person is intending to act on the information contained in this email, consideration should be given to the appropriateness of this general information in the light of that person’s own objectives, financial situation or needs before acting on the information. Persons acting on any matter covered in this article should seek independent professional advice on the application of that matter to their individual circumstances. In relation to any financial product referred to in this article, a copy of the Product Disclosure Statement should be obtained. This information is current as of July 2023. This information has been prepared for use by advisers in their professional capacity only. We do not approve this article being provided directly to customers.
|
