STRATEGY 2
STRATEGIES FOR
OLDER CLIENTS.
ADVISER USE ONLY
CommInsure Investment Growth Bond Strategy Series
Issued: November 2015
AT A GLANCE
This technical paper focuses on how advisers can help
older clients with issues such as leaving investments to
beneficiaries and maximising pension payments. Specifically,
this paper focuses on how insurance bonds can assist with:
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age pensioners and the Centrelink income test
potential tax benefits
benefits in estate planning
Death Benefit Guarantee
providing for grandchildren.
Age Pensioners and the Centrelink income test
Many of your pensioner clients are assessed for their age pension
by Centrelink under the Income Test rather than the Assets Test.
Insurance bonds held through a family trust may provide significant
advantages for these clients by maximising their pension payments
calculated under the Centrelink Income Test (under attribution rules,
the assets will continue to be assessed under the Assets Test).
The amount of age pension received depends on family
circumstances, income levels and assets. The eligibility to receive age
pension is determined by both an income and assets test – the lower
rate payable under the two tests applies. Income includes deemed
income from financial investments. Current1 deeming rates are:
•• For a single person, 1.75% for the first $48,600 of total
investments, and 3.25% for any balance over $48,600;
•• For a pensioner couple (both receiving a pension) or
a pensioner/allowee couple (one person receiving a pension
and the other receiving an allowance), 1.75% for the first
$80,600 of their combined total investments, and 3.25% for
any balance above $80,600.
The current maximum age pension per fortnight is $867.00 for
a single person and $653.50 each for couples. The base amount
of income a single pensioner can receive is $162 per fortnight.
This is called the Income Test free area. Where income exceeds
$162 per fortnight the pension reduces by 50 cents for every
dollar of income above this amount (40 cents for transitional rate
pensioners). The income test free area for a couple, where both
are receiving a pension is $288 per fortnight. Where the combined
income exceeds $288 per fortnight, the pension reduces by
25 cents each for every dollar above this amount.
1 Centrelink rates and thresholds are as at 20 September 2015
2 Includes Medicare Levy of 2%
Tax benefits
Taxation on investments upon death is a large consideration for
advisers, clients and beneficiaries, particularly when clients have
non-dependant children as beneficiaries. In the super environment,
death benefits paid to non-dependants risk tax of up to 32%2.
Insurance bonds offer an alternative in these situations as they allow
proceeds to be paid to any beneficiary (including non-dependants)
tax free. In making a decision, it’s also important to consider the
different tax environments that insurance bonds and superannuation
in accumulation phase and pension phase operate in.
Benefits in estate planning
Leaving the potential tax benefits aside, insurance bonds can
also be structured in a number of ways to solve estate-planning
problems. Clients can nominate more than one beneficiary and
stipulate the percentage each will receive. When a beneficiary
is nominated, the proceeds will not be subject to challenges to
the client’s estate, as they will not form part of the estate assets
(except in NSW).
Complex family situations can also be accommodated. For clients
with children with a marriage at risk, insurance bonds can provide
a level of asset protection for the children. Upon death of the client
(i.e. the parent), bond proceeds can be paid to their estate and
included in the creation of a discretionary trust in their Will for the
benefit of the children.
CommInsure ‘Death Benefit Guarantee’
CommInsure’s Investment Growth Bond offers another advantage
for estate planning and wealth transfer in its Death Benefit Guarantee
(DBG). The DBG provides certainty around the minimum amount
that will be paid on the death of the last surviving life insured, which
can be particularly important during times of market uncertainty.
CommInsure guarantees that if the last surviving life insured dies
on or prior to their 99th birthday to pay the higher of:
a) The cash value of the Bond, or
b) The lesser of the Net Contribution Value and the Maximum Amount.
If the last surviving life insured reach their 99th birthday, the client
may request a full withdrawal of the Bond and CommInsure will
pay the greater of the two amounts described above.
Refer to the PDS for more details on the DBG, including eligibility
criteria, which requires that the youngest life insured on the policy
to be aged less than 85 years of age at the policy commencement.
Providing for grandchildren
Where the client only wants to provide for grandchildren, bonds
can be set up as a child advancement policy. Ownership would
automatically transfer to the grandchild at a stipulated age (from
10 to 25 years of age), without capital gains tax consequences.
It should be noted that pensioners will need to be cautious not to
breach gifting rules of $10,000 per financial year or $30,000 over five
years, when setting up or transferring a bond for their grandchildren.
Strategies
ANNE, 85
Anne is a widow who has sold her home and moved into
aged care. After paying a lump sum accommodation
payment of $300,000 to enter the aged care facility, she has
$550,000 available to invest.
Anne is income tested for age pension purposes as she
receives a Comsuper pension of $24,000pa.
After seeing an adviser, Anne opens a family trust and
transfers $400,000 into the trust. The trust then purchases
an insurance bond as its sole asset. As part of the
adviser’s recommendation Anne has sought specialist
legal advice to ensure the family trust ownership is
properly structured.
For Centrelink purposes, the value of a family trust-owned
insurance bond is not deemed. The income is assessed
on the adjusted net profits of the trust based on the trust’s
tax return. As insurance bonds do not generate assessable
Financial Assets
Bank Account
Term Deposit
Insurance bond owned
by family trust
Age pension entitlement
$25,000
$525,000
Using Insurance
Bond Structure
$25,000
$125,000
$400,000
Annual
Annual
Under Assets Test
$14,918^
$14,918^
Under Income Test
$4,075^
$10,575^
Actual pension
$4,075^
Annual
$10,575^
Annual
$17,469
$20,891
$38,360
$17,469
$17,632
$35,101
$6,500
$3,259
Aged care costs
Daily care fee
Means tested fee
Total aged care fees
Extra age pension
Reduction in aged
care fees
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Current Situation
Age pension rates and thresholds are current as at 20 September 2015 and are subject to change.
income, the family trust will
have no assessable income
from the investment bond,
therefore no income will be
counted under the income
test, however bonds are still
assessed under the assets test.
By using the family trust-owned
insurance bond strategy, Anne
increases her age pension and
reduces her means tested aged
care fees.
To compare Anne’s situation in the first year of the strategy:
By investing $400,000 in a family trust which invests in an
insurance bond, Anne has reduced her assessable income
for both age pension and means tested fee purposes.
Anne receives additional age pension of $6,500pa and
a reduction in means tested fees of $3,259pa, a total
benefit of $9,759pa.
It’s important to note however that prior to investing in the
insurance bond, Anne was receiving interest from her term
deposit at 3% pa totalling $15,750pa. By investing $400,000
in an insurance bond she has reduced her term deposit
interest to $3,750. While the insurance bond is generating
earnings, Anne will not receive income distributions from
the insurance bond unless she makes a withdrawal from the
bond. Therefore she would need to ensure she has sufficient
cash flow to meet her aged care and living expenses.
Tax implications also need to be considered. The insurance
bond is internally taxed at 30% and this needs to be compared
to the tax payable if Anne held the investments in her own name.
HEATHER, 72
Heather, a self-funded retiree, has six grandchildren aged
between 8 and 18. Heather’s three adult children are always
bickering and she is concerned that there may be conflicts
over her estate when she dies. Heather would like to set
up an inheritance for each grandchild that’s safe from any
family disagreements over her will. She has a couple of
options including:
•• Heather can set up child advancement policies for those
of her grandchildren under the age of 16, using
CommInsure’s Investment Growth Bond. Under this
structure, which is governed by the Life Insurance Act
1995, each grandchild would be the life insured and
Heather would be the policy owner. Heather would
nominate a vesting age (between the ages of 18 and
25), at which time the grandchild would automatically
assume full ownership and control of the policy. Until
then, Heather would retain full control of the investment,
including the ability to make withdrawals and switches.
If Heather was to die before the vesting age, she
could leave instructions in her will for the trustee of her
estate to be the policy holder of the investment until the
grandchildren reached vesting age.
•• What about Heather’s
grandchildren over the
age of 16? Heather could
also set up a CommInsure
Investment Growth Bond
for each of them, with
the grandchild as the life
insured and herself as the
policy owner. As above, she
could leave instructions
in her will for the trustee
to hold the policy in trust
for the children until a specified age, at which time the
investment would transfer to them, at the same time retaining
the investment’s tax status. The advantage of the latter
strategy is that Heather could instruct that the investment
transfer at an age beyond 25. A further advantage is the
children are not inheriting an unrealised tax liability (CGT)
that might occur if actual shares were transferred to the
beneficiary upon death – under the insurance bond, the only
tax liability occurs if the beneficiary withdraws the proceeds
within 10 years of policy commencement.
CommInsure Investment Growth Bond
Summary
CommInsure’s Investment Growth Bond offers competitive
features and product guarantees including:
This strategy paper illustrates a variety of situations where
insurance bonds can provide benefits to older clients. They can
be used to great advantage in maximising pension payments
calculated under Centrelink’s income test or to reduce aged care
facility costs. In addition, the death benefit guarantee feature
within the CommInsure Investment Growth Bond provides some
certainty around the minimum amount that may be paid out from
their policy on their death. Death benefits paid from insurance
bonds are tax free in the hands of the recipients. Whereas, super
death benefits paid to non- dependants risk paying death benefits
tax on the taxable component of 17%1 or up to 32%1 if the death
benefits are sourced in part or whole from insurance proceeds.
This paper shows how insurance bonds can be a simple
investment alternative in estate and tax planning.
•• Range of multi-sector and single sector investment options,
four of which have guarantees designed to provide certainty
around the minimum value of the client’s holdings in that
investment option.
•• A death benefit guarantee which provides certainty on the
minimum amount that will be paid on the death of the last
surviving life insured. This guarantee pays back the client’s
contributions to the bond (less withdrawals and fees) if this
is higher than the cash value of the bond.
•• Access funds at any time, with a minimum withdrawal
of $1,000 ($500 for automatic withdrawals).
Fees
•• No establishment, contribution, withdrawal, termination or
Awards
switching fees apply.
•• Only a management fee applies for each investment option.
•• Adviser Service Fee arrangements can be established.
For seven consecutive years, CommInsure’s Investment Growth
Bond has been recognised as number one in the market by winning
AFA and Plan for Life’s ‘Investment Bond of the Year’ award.
1 Includes Medicare Levy of 2%pa
For more information please contact our InsuranceTech
team on 1800 761 067.
21718/301015 CIL925
AFA Investment Bond Award Winner 2014
Things to know before you Can: This brochure was prepared by CommInsure, a registered business name of The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 AFSL 235035 (CMLA), a
wholly owned but non –guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (the Group). It is for use by the Group employees and financial advisers only and is not to
be issued, reproduced in whole or in part, or made available to members of the public. The taxation information, social security information and examples are of a general nature only and should not be regarded as
specific advice. Case studies in this brochure are for illustrative purposes only. Certain assumptions are made and explained in each case study. Information in this brochure is based on the continuation of present
taxation laws, superannuation laws, social security laws, rulings and their interpretation as at the issue date of this brochure. Advisers should refer to the relevant life company policy documents for further clarification.
CommInsure is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intent to rely on this
information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.