What you need to know about having TDP insurance through your super

Most people have some insurance through their superannuation fund; commonly life insurance and total permanent disability (TPD) insurance. This is because:

1. Premiums are usually cheaper because the fund can negotiate a lower rate for bulk insurance for its members
2. It is a tax effective strategy for the premium to be paid out of your superannuation contributions from pre-tax dollars.

If you do have insurance through your super fund there are three things you need to be aware of:

1. Life insurance is consistent with the objective of superannuation and is therefore 100% tax deductible if the policy is owned by the superannuation fund
   
   
2. The wording of each TPD policy varies so the tax treatment is not always clear cut. The current law provides that disability premiums are only deductible to the extent that the policy has the necessary connection to a liability of a fund to provide permanent incapacity benefits to a member. Where additional cover is provided for extras including “own occupation” etc there is a need to pro-rata the deduction under current law. In these circumstances an actuary’s certificate is required to support the deduction claimed which can be costly and time consuming.
   
   There is a Superannuation Bill Amendment currently being reviewed by Parliament outlining a number of transitional arrangements to simplify the process of obtaining a tax deduction for the cost of TPD but under current law generally part of the policy is not tax deductible.
   
   The transitional relief will allow complying funds to fully deduct TPD insurance premiums by simply broadening the definition of permanent incapacity. This will remove the need for the actuarial certificate and to pro-rata the cost of the premium. The deduction will be available retrospectively for the periods 2005 – 2011.
   
   
3. A payment of TPD even if paid to the superannuation fund by the insurance company may be trapped within the fund until the member retires. 
   
   For example Bill is a member of ABC Super which took out a TPD insurance policy to cover its members in the event of them being permanently disabled by a ‘loss of limb’. Bill had an accident which resulted in a loss of limb, but after a period of rehabilitation he could still perform his regular employment duties. ABC Super received a payout under the insurance contract. However, it could not pay this amount to Bill immediately as the permanent incapacity condition of release had not been met. ABC Super could pay the money to Bill only in the event of a condition of release, for example, retirement.
   
   Under transitional relief, this will not change. If the condition of release is not satisfied as per the Superannuation Industry (Supervision) Act 1993, i.e. retirement, than the fund has no grounds to pay out the benefit to the member.

For more information on having life insurance and TDP insurance through your super, please contact us