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Insurance in super

Types of insurance which may be held in super

Section: 13.1

Insurance cover is usually provided pursuant to an insurance policy negotiated between the trustee of the super fund and an insurer.

Insurance may be available through a personal super product, or through a group arrangement, such as an employer super master trust, or an industry or corporate super scheme. The taxation implications of an insurance payout through super will vary depending on the type of insurance and are covered later in this Chapter.

It is important to note that this guide does not deal with situations where insurance is taken out by super fund trustees that involves proceeds being paid somewhere other than for a specific member's benefit (eg to a fund reserve). Different rules and tax treatment may apply in those situations.

The situation before 1 July 2014

Prior to 1 July 2014, members of complying super funds were generally able to take out a range life and disability insurance policies issued by a life insurance company within their fund. These included:

  • Life insurance including terminal illness insurance
  • Total and Permanent Disability (TPD) insurance (both any and own occupation definitions)
  • Income protection insurance, including policies with a range of ancillary benefits
  • Trauma insurance

The only requirement was that a trustee needed to ensure the acquisition of the policy would not cause the fund to breach the acquisition from related party rules and would be permitted under the sole purpose test and the fund's governing rules.

1 July 2014 changes to allowable insurance through super

New rules came into effect on 1 July 2014 that aim to ensure that where members hold insurance policies within super, they are able to access the insurance proceeds from their fund in the event of a claim.

The rules prohibit the trustee of a super fund from providing insurance cover to a member unless the terms and conditions of the insurance policy align with one of the following conditions of release:

  • Death (including a terminal medical condition)
  • permanent incapacity, or
  • temporary incapacity

The Government has confirmed that the insurance policy definition that the insurance cover to a member unless the terms and conditions of release definitions  as specified in the SIS regulations, but that they must be consistent with those definitions and that the insured benefits must be able to be released to members in the event of a claim.

The impact these changes will have on  the types of insurance that can be held via super are summarised as follows:

Total and permanent disability (TPD) insurance

Super funds will generally be prohibited from taking out 'own occupation' TPD policies on behalf of their members from 1 July 2014, as a benefit may become payable despite the fact that the member may still be able to engage in some other employment for which they were qualified by education, training or experience.

'Any-occupation' TPD policies that provide additional ancillary lump sum benefits, such as loss of limbs or sight benefits, without requiring the member to also satisfy the permanent incapacity requirement, will also not be able to be provided through superannuation.

Income protection insurance

Under the temporary incapacity condition of release, a benefit may only be paid in the form of a non-commutable income stream paid for the purpose of continuing (in whole or part) the gain or reward which the member was receiving immediately before the
temporary incapacity.

Super funds will therefore generally be prohibited from taking out income protection policies for their members where the policy terms and conditions provide any ancillary lump sum benefits, such as redundancy, crisis, rehabilitation, specific injury or home care benefits.

In addition, to satisfy the definition of temporary incapacity in the SIS Regulations, a member must:

  • have ceased to be gainfully employed due to ill-health, or
  • have temporarily ceased to receive any gain or reward under a continuing employment arrangement due to ill-health.

Income protection policies offered within the superannuation environment will therefore need to require the member to be gainfully employed (including self-employed) at the time of suffering the incapacity. For example, a trustee will be prohibited from providing cover under an income protection policy that would provide benefits to a member who was not gainfully employed at the time of suffering the invalidity.

The 1 July 2014 changes also mean that income protection policies that pay a partial benefit where a member only reduced their hours of work due to incapacity, rather than ceasing them completely, cannot be offered within the superannuation environment. However, it is important to note that a policy that provided a partial benefit to a member who returned to work on a part-time basis after first completely ceasing to work is permitted.

Trauma insurance

Trauma insurance policies within the super environment will generally be prohibited from 1 July 2014 as their terms and conditions do not align with one of the specified conditions of release.

Last modified: Tuesday, May 2, 2017