It seems an innocuous question. Yet the answer could be have unintended consequences.
For most executives, an income protection policy is an obvious decision. And for most employees, ownership is also obvious. The employee wants to be the beneficiary if he or she is temporarily unable to work through illness or accident.
But it is often a different situation for a business owner.
You and your accountant have probably spent some time in structuring your finances to legally minimise your taxation liability. You may draw a salary from the business but you may also retain profit, fund eligible expenses from the business or distribute profits via family trust to your family members or holding company.
For example, you may own a business that generates $400,000 profits after cost of sales and expenses. The company may pay you a salary, retain some earnings and distribute the rest to a family trust that, in turn, distributes the funds to you, your wife, your children and, perhaps, others.
If the above profits are a result of your personal exertion and these profits are expected to cease in the event of your disablement then this is insurable income. A well planned and structured income protection policy will take into account BOTH your salary and profit distributions – even if all those distributions do not go directly to you.
In this example, owning an income protection policy as an individual in this case could have negative implications. You would lose all of the tax advantages you had spent time and energy in developing because the payments from the claim would go directly to you as an individual and be taxed at your personal marginal tax rate.
If, in this case, the policy may be owned by your business or family trust and not you, the payments from the claim would go to the business or your family trust that could then use the money to pay you a salary and distribute monies to your family trust, maintaining the tax advantages. You may decide to divert some of the income to pay a manager to take your place while you are unable to work.
There is a potential downside to this option as well. If you business owns the policy if the policy is poorly performing and has ongoing secured financial commitments your claim proceeds may never reach their intended destination. If your business is sold or wound up as a result of your disablement you may need to continue to maintain the entities simply to run your income protection claim or re-administer the policy which may have tax implications. If the bulk of your income is distributed to your family trust this may be the better entity to hold the policy.
On the other hand, you might decide that your self-managed superannuation fund is the best owner of the income protection. This provides you cash flow advantage in funding the premium and the ability to draw down from the fund because you are temporarily unable to earn an income. However, you again may lose you tax minimisation strategies as the claim payment would need to be paid to the disabled member.
The simple answer to the question we posed at the beginning is that ownership depends upon your business structure, your personal needs and a range of other issues. Seek professional advice before you sign your policy so that any income from a claim will achieve the best result for you.