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Insurance and financial considerations for the next generation

by Tom McDonald

Last year my wife and I welcomed our first child. With all the joy that she brings, having a child has really made us consider what some of the key financial priorities are for our family over the next few years.

While the majority of our clients have children much older than we do & some would even be welcoming grandchildren, the following strategies may be of interest to discuss around the dinner table.

Insurance bonds

An insurance bond is a tax structure that operates like a managed fund and can be of great benefit when investing for children. Generally speaking, children aged under 18 are taxed at special tax rates on unearned income, like investment income. This tax rate is currently 66% on any earnings over $416 per annum for children. An insurance bond, however, is taxed differently as the tax is paid by the product provider at the company tax rate, rather than at the children’s unearned tax rates. Some other advantages of using insurance bonds when investing for children are:

  • Simplicity and no need to include earnings in the tax returns of either parent or child while the funds are invested
  • No penalty taxes if investment is held in the name of the child
  • Choice of underlying investments including growth assets
  • There are no capital gains tax consequences where the policy owner decides to switch from one investment option to another 
  • Fully tax paid after 10 years
  • Upon death of the parent, the bond does not form part of the estate and goes directly to the child
  • Child can continue to make contributions* to the bond after it has transferred into their name
  • The bond can be assigned or used as security for a mortgage or charge subject to the terms of the policy
  • Generally higher returns than term deposits
  • Can accept regular or lump sum contributions

*subject to contribution rules

There are some disadvantages however, including:

  • The product provider is not eligible for the 50% CGT discount on assets supporting the bond
  • If the bond is redeemed before 10 years, some or all of the income will be taxed at the investors marginal tax rate, but the investor will receive a tax offset
  • Fees can be relatively high on these products
  • Contributions can only be made equalling up to 125% of the previous years’ contribution without the 10 year period starting again.
  • Restrictions are placed on the age that a child can own an insurance bond:
      - Under 10 – not available, so the only option is for a parent/grandparent to hold on the child’s behalf
      - Between 10 and 16 – only with parents/grandparents approval
      - Over 16 - no restriction.

Personal Insurance

Personal insurance is not necessarily an exciting topic, but is one that is important to consider when you have a growing family (and/or debt).  Whilst the terms can vary, personal insurance generally considers:

  • Life Insurance

If you die whilst covered by a life insurance policy, your surviving family members, or anyone else you choose, are paid a one off lump sum.

  • Total & Permanent Disability Insurance

If you suffer a sickness or injury that leaves you totally and permanently disabled and unable to work for the rest of your life, Total & Permanent Disability (TPD) protection provides you with a lump sum payment.

  • Trauma/Critical Illness Insurance

On the diagnosis of specific serious medical conditions and procedures, such as a heart attack, cancer or a stroke, Trauma/Critical Illness Insurance can provide you with a tax-free lump sum payment.

  • Income Protection Insurance 

If illness or injury robs you of the ability to work, the right policy could replace up to 75% of your annual income.

Another reason that I found personal insurance important to consider now (being in my early 30’s) rather than later in my life is that premiums increase significantly as the life insured gets older. While this may not be of surprise to anyone, what may be interesting is how steeply premiums can increase.

At Cardena Private Wealth, we have recently partnered with an insurance specialist. If Insurance or Insurance Bonds are of interest to you or your children, please do not hesitate to get in touch.


The information provided in this article is general information only and is not intended to imply any recommendation or opinion about a financial product. This information does not take into account your personal objectives, financial situation or needs. You should consider whether the information is appropriate for you in light of your personal objectives, financial situation and needs, and consult your Cardena Private Wealth adviser before making a decision.