Insurance in super
Pre 1 July 2014 insurance considerations
'Own occupation' TPD insurance
An 'own occupation' TPD insurance policy will generally provide a lump sum benefit in the event that the insured member is unable to work again in the occupation they held just prior to becoming permanently disabled. With the permanent incapacity condition of release requiring that a member be unable to work again in any occupation that they're qualified for by education, training or experience, there is a real risk that in the event of a claim, the member will satisfy the insurer's definition but not the permanent incapacity condition of release.
For members who would not meet an alternative condition of release in the event of a claim (eg retirement after preservation age), particularly where part or all of any TPD insurance proceeds will be required as a lump sum in the event of incapacity, advisers should consider recommending holding own-occupation TPD cover outside the super environment.
Income protection insurance
In the event of a claim for income protection insurance, a member will generally meet the temporary incapacity condition of release, which is broad enough to encompass most income protection policy definitions.
However, it is important to note that any additional ancillary lump sum benefits, such as redundancy, crisis, rehabilitation, specific injury or home care benefits, will likely not be accessible from super in the event of a claim, as the temporary incapacity condition of release only allows for the payment of a non-commutable income stream for the purpose of continuing (in whole or part) the gain or reward which the member was receiving immediately before their incapacity.
Trauma insurance proceeds are payable to the trustee (and form part of a member's overall benefit in the fund) if an insured member suffers a medical condition or other trauma event covered under the policy.
Even prior to the 1 July 2014 changes, trauma insurance had not been widely used within the superannuation environment because of questions around whether the offering of such insurance is in line with the sole purpose test. However, SMSF Determination SMSFD 2010/1 clarifies this matter for SMSFs. A trustee of a SMSF can purchase a trauma insurance policy and still satisfy the sole purpose test provided:
- any benefits payable under the policy are payable to the trustee and will form part of the fund's assets until the member satisfied a condition of release, and
- the purchase of the policy is not made to secure a benefit for another person, such as a fund member or their relative.
There is also no specific 'trauma' condition of release and, where a member holds trauma cover through super and a benefit is paid to the trustee, they would therefore need to satisfy another condition of release, such as permanent incapacity or retirement, to access their benefits. This will in some cases lead to members being unable to access trauma insurance benefits that have been paid into their superannuation account.
Last modified: Thursday, January 11, 2018