Should I hold my TPD insurance within Superannuation?
In our article ‘Superannuation linked Life Insurance‘, we discussed which insurance products could be taken through a superannuation account. TPD Insurance is one product that is eligible to be held within superannuation. That article revealed some of the limitations TPD Insurance imposed through the Superannuation Industry Supervision legislation.
Subsequently, readers raised questions as to the Pros – and the Cons – of holding TPD Insurance within superannuation. Certainty of financial protection for themselves and their dependants in the event they become permanently disabled is paramount to them.
The Pros and Cons of owning TPD insurance within superannuation accounts –
The following Table shows the Pros and the Cons of holding Total and Permanent Disability (TPD) Insurance in this way. A number of these features are common to those applicable to holding any ‘life’ insurance policy under a superannuation regime. They have been restated in the Table for purposes of completeness:-
Pros |
Cons
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Auto Acceptance.When taking cover through a group superannuation account, cover may be available on an ‘auto acceptance’ basis. Employer, or industry fund usually fall into this category. Personal statements and medical reports are not required for the cover to come into force. Premiums will usually be at what is known as ‘standard rates’. This means there won’t be any loading for Smoker status/ health issues, applicable to the applicable industry/ occupation code. |
The benefits, terms and conditions of policies issued under ‘auto acceptance’ terms may not satisfy your personal needs/ circumstances. These policies may have some unexpected exclusions or limitations applied when a claim is made. This aspect is somewhat similar to ‘direct insurance’ taken online or by phone in response to media advertising. |
CashflowInsurance premiums will be paid from the superannuation account balance and not directly from your after-tax dollars (personal cashflow). This makes them more affordable. |
Premiums paid for TPD Insurance out of the superannuation account erode the accumulating contributions and investment returns. Additional concessional contributions calculated to offset this effect can be beneficial. However, these may be impeded by the contribution caps imposed under legislation. |
Group premiumsInsurance policies owned through grouped superannuation accounts may be available at a lower premium cost. Industry funds, employer groups and some ‘platforms’ offerings fall into this category. This is achievable because of the volume of business secured by the insurer through the particular source. |
Insurance policies held under group funds MAY expire after a term of non-receipt of contributions from the employer. Employer group funds and/ or industry funds fall into this category.
Premiums payable for policies in group accounts may, following leaving an employer group, be charged on a more costly basis. This increase can be significant. This can result in you being declared a Smoker for premium calculation purposes. (This can be rectified in appropriate circumstances and you should seek advice on the matter.) |
SMSFsFor trustees of a self-managed superannuation fund that has invested in direct real property (whether or not subject to borrowings external to the fund) there is an advantage to protect the assets of the fund for the contingency of the untimely total and permanent disability of one of the members. This is particularly applicable to a member with a disproportionately high contribution to the ability of the fund to meet its commitments (because of higher contributions made by or on their behalf). |
Claims made against TPD Insurance within a super fund are, when eventually* paid out to the member, subject to taxation. The relevant tax payable is determined using a complex formula utilising days of service and days to (normal) retirement.
*Claims are initiated through the trustee to the insurer. Payments eventually then flow from the trustee to the member: this can cause (stressful) delays. |
CompulsionMembers wanting to insure through a superannuation account, for a TPD event are required to also hold a Life (Death) policy through the same account. |
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Occupation DefinitionsThere are two occupation definitions^ that apply to potential claims under a TPD policy: they are ‘any occupation’ and ‘own occupation’. Any new TPD policy taken by the trustees of a superannuation fund must be issued on the ‘any occupation’ definition. The features of policy arrangements designed to provide more complete cover under an ‘own occupation’ definition are dealt with below. ^ Under the ‘Any Occupation’ definition, a claim will generally be paid if you’re unlikely to be able to work in any occupation that you are suited to by education, training or experience. A claim under the ‘Own Occupation’ definition should be satisfied when you’re unlikely to be able to work in your current occupation. |
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Trustee variationsThe above point is of particular concern if you are insured through an employer group plan or an industry superannuation fund: under these arrangements, the trustees negotiate terms of the policies they offer – and they retain the right to vary those terms without notice to their members. There are a number of instances where members have been exposed to lesser protection because of actions taken by trustees to reduce premium costs: one that we became aware of in November 2014, was Australian Super, who adversely varied the generally applicable definition shown above, by changing ‘unlikely’ to ‘never’; and added the rider – ‘or any job they may become suited to.’ |
Trusted advice about insurance and superannuation –
Insurance and Superannuation are two elements common to the wealth management needs of most of us having attained working age. As with many of the financial dilemmas, there is usually more than one answer to our questions about them. Personal circumstances have a direct impact on what the best answer to your financial dilemmas might be. At Continuum Financial Planners we work to the mantra that – ‘we listen, we understand; and we have solutions’ to your specific needs. And we deliver those answers in personalised, professional wealth management advice.
If you are holding TPD Insurance within Superannuation, to ensure that your best interests are provided for, contact our office (by phone 07-34213456). Alternatively, arrange a meeting with one of our experienced advisers: make the appointment directly through this Book A Meeting link.
Originally published in November 2014, this post has been occasionally refreshed/ updated, most recently in July 2024.