It is said that the only constant in life is change. Change is inevitable and as such, it is important to be well prepared for any changes that may occur in your life, whether good or bad. Total and permanent disability insurance is a cover that will offer you a safe landing should things turn for the worse. TPD insurance is designed to cover you if you contract an illness or an injury that makes you unable to continue working in your occupation or in any other occupation. It will normally cover your day to day cost of living, your rehabilitation costs and also repayment of your current debts.
How To Take Out Insurance
If you would like to take out a TPD insurance cover, there are basically two ways in which you can do it. You can either take out the insurance in your name, or you can decide to hold it in your superannuation fund. The superfund is a method that is used to save for retirement, and the funds come from various sources, including contributions from your employer and your own contributions. You may also get some contributions from the government. Most super funds will also have an arrangement where you can take out your TPD insurance through the superfund.
If your payout will be made as a lump sum or through pension and you are above 60 years of age, then there will be no tax levied on your benefit. If you are between 55-59 years, the first 175,000 dollars will be tax free, and the remaining amount will be charged at 15 per cent, which also includes Medicare levy. Anyone who is below the preservation age of 55 years will be taxed a maximum of 21.5 per cent on any lump sum amount that is withdrawn, including your Medicare levy.
Tax Implications Through Super Fund
If your TPD insurance is housed in the super fund, the proceeds from the insurance will first be added to the taxable component of the lump sum. The government will normally offer an exemption in recognition of the fact that the payout is because you will no longer be able to engage in gainful employment. The exemption is related to the period between when you become incapacitated to the date that you reach the retirement age of 65 years.
In order to calculate the tax of a TPD fund, the tax free component of the lump sum has to first be calculated. The formula used is taking the amount of benefit paid multiplied by the result of dividing days of retirement by the addition of service days and days to retirement. This is then added to the portion of the lump sum from tax free money. The tax free component is then deducted from the superannuation benefit before tax is calculated. Just in case the tax free amount exceeds the amount of benefit to be paid, then the tax free amount will be equal to the paid benefit.
Tax Implications If Cover Is Taken By Individual
If you have taken out an individual TPD cover, then there is normally no complication when withdrawing a lump sum TPD insurance payout. Taxable amounts are only on the premiums paid out, but once you make a lump sum withdrawal, the amount is tax free.
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