I’m 63 and plan to retire soon. Should I keep my life insurance?

I am 63 and plan to retire at 65, so I have about two years left to work. All of my insurance is held inside my super fund. I currently have death cover of $800,000, total and permanent disability (TPD) cover of $200,000, and income protection of $10,000 per month. What do you generally suggest people do with their insurance as they approach retirement? Do we really need this level of life insurance at this stage of life, and when is it beneficial to reduce or cancel cover?

The purpose of insurance is to protect you against events that would leave you in serious financial difficulty if they occurred, and you were uninsured. Insurance comes at a cost, and that cost rises each year as you get older.

As you approach retirement, it makes sense to reassess what financial damage would actually be done if you died, became disabled, or were unable to work. If your debts will be cleared at retirement and your wife would be financially secure without your income, the need for large amounts of life insurance reduces sharply.

If you are confident your family would be financially secure without insurance, it is sensible to reduce or cancel cover rather than keep paying rising premiums by default.

I have $100,000 which I am considering giving to my adult daughter. She is 29 and living with her boyfriend. I am weighing up whether the money should be contributed to her super, or used to start an education or investment bond. My concern with a super contribution is that she would not be able to access the money for 35 years or more, and that it may form part of the asset pool in the event of a future relationship breakdown.

I am therefore leaning towards an insurance bond which could be accessed tax-paid after 10 years and used for her children’s education expenses — or for herself if she does not have children. Is this a sensible way to use the funds, and are there any issues I should be aware of?

I think you are on the right track. But there is a common misconception about insurance bonds. You don’t have to wait 10 years to withdraw your money — the bonds can be redeemed on demand.

If the bond is held for 10 years before redemption, the entire proceeds become tax-free in the hands of the owner irrespective of the income of the owner of the bond. If the bond is cashed in before seven years, tax is paid at the investor’s marginal rate, less a 30 per cent rebate to compensate for the tax already paid by the bond fund.

This makes them tax-free for anybody earning between $45,000 and $135,000 a year. People on lower tax brackets may even receive a cash rebate.

Just keep in mind that, like superannuation, the return of the bond will depend on the asset allocation chosen. You should take advice on this, but I think a good mix for a 29-year-old would be Australian shares, or a mixture of Australian and international shares.

Another bonus of insurance bonds is that you can switch between categories of assets within the bond without incurring capital gains tax on the switch.

My wife and I have two properties, one in Melbourne and one down the beach. Both properties are in her name. One is our residence, the beach house has always been a holiday home and has never been rented. The beach house was funded by a home loan in both our names. It was bought 15 years ago. Can I be added as her spouse to both titles without incurring any taxes?

You need to talk to your solicitor and accountant because there could be stamp duty on both transactions, and there’s almost certainly going to be capital gains tax on the transfer of 50 per cent of the beach house to yourself.

Since the house has never been income producing, you can add all ownership expenses to the base cost to reduce your capital gains tax. This includes rates, insurance, land tax, and other ongoing expenses such as pool maintenance and electricity.

I am 75 and have about $350,000 in the tax-free component of my super, and about $98,000 in the taxable component. I have no dependants and I already have a will. I have been told that when my super is paid to my beneficiaries, the taxable component will be taxed at 30 per cent plus the 2 per cent Medicare levy. Is there any way, while I am still alive, to reduce or eliminate the taxable component of my super so that my beneficiaries do not face this tax?

Many people attack this problem by making withdrawals from their superannuation and then recontributing the money as a non-concessional contribution. This reduces the taxable element. Unfortunately, as you have reached 75, you are over the threshold for non-concessional contributions.

A way out is to withdraw the money tax-free before you die and give it to your beneficiaries where it can be received tax-free, eliminating the 15 per cent tax on the taxable component. Another option is to give your attorney instructions to withdraw your superannuation if your death is imminent and deposit the money in your personal bank account.

Just be aware that if your superannuation is with one of the big funds, it may take quite a while to have your member benefit processed. Therefore, don’t leave it to the last minute.

Noel Whittaker is author of Retirement Made Simple and other books on personal finance. Questions to: noel@noelwhittaker.com.au

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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