Your income throughout your working life is a key financial resource, it allows you to fund your lifestyle expenses and work towards achieving your financial goals and objectives, now and in the future.

Therefore, it’s important to understand that in your working life, you have a 1 in 3 chance of being disabled for more than 3 months*. And unfortunately, coupled with this, if you were to be off work for:

1. ’20 days, the chance of ever getting back to work is 70%.

2. 45 days, the chance of ever getting back to work is 50%.

3. 70 days, the chance of ever getting back to work is 35%’^.

In the event that you were to become totally and permanently disabled due to a sickness or injury and unable to work again, a total and permanent disability (TPD) insurance policy could play a vital role.

For example, upon a successful claim, a TPD insurance policy would provide you with a lump sum benefit payment, which depending on your personal circumstances, could assist with one or more of the following:

• Debt reduction;
• Income generation;
• Lifestyle modifications; and,
• Immediate and ongoing medical expenses.

Notably, when establishing a TPD insurance policy, it’s important to choose the most appropriate ownership structure for you. In terms of ownership structure, this can include the choice between having your TPD insurance policy held inside or outside of super (super or non-super).

There can be advantages and disadvantages to each ownership structure. Below we provide an overview of this from a claim definition and tax treatment (insurance premiums and benefit payment) perspective.

Please note: We cover these ownership structures in terms of the following:

• Super. Your super fund trustee owns the TPD insurance policy on the member’s life (your life).
• Non-super. You own the TPD insurance policy on your own life for personal protection purposes, and you pay the insurance premiums.

Claim definitions

In terms of TPD insurance policy claim definitions, there are many different types available, with some restrictions on eligibility based on age, occupation, medical history, and ownership structure.

With this said, there are two main types of TPD insurance policy claim definitions that insurers offer:

• Any occupation. In general, you will need to be assessed by the insurer as being incapacitated to such an extent, solely because of a sickness or injury, as to render you unlikely ever to be able to work in any occupation for which you are reasonably suited by training, education or experience.
• Own occupation. In general, you will need be assessed by the insurer as being incapacitated to such an extent, solely because of a sickness or injury, as to render you unlikely ever to be able to work in your own occupation.

Please note: Other types of TPD insurance policy claim definitions include homemaker and general/all duties.

With the above in mind, when looking at a super ownership structure, from 1 July 2014, a TPD insurance policy with an ‘own occupation’ claim definition is no longer able to be held inside super. However, grandfathering provisions do apply for relevant TPD insurance policies that were established prior to this date.

In contrast to super, there are no TPD insurance policy claim definition restrictions placed upon a non-super ownership structure. However, it’s important to note that some insurers do offer super-linked TPD insurance.

In a nutshell, super-linked TPD insurance can allow you to obtain an ‘own occupation’ claim definition as well as many of the other benefits associated with holding personal insurances inside super (see below).

Tax treatment

In terms of TPD insurance policy tax treatment, there are several things to consider, for example, the tax treatment of not only the insurance premiums payable but also the benefit payment itself.

With regard to a TPD insurance policy within a super ownership structure:

• Insurance premiums. The super fund trustee can generally claim the insurance premiums as a tax deduction, reducing the tax paid by the super fund trustee. The tax saving is often rebated to your super account, effectively reducing the premium cost by 15%. Also, where you are eligible to and do make super contributions to fund the insurance premiums payable, you may be, for example:
  • Entitled to claim a tax deduction (on personal deductible super contributions).
  • Eligible for the Government co-contribution (on non-concessional contributions).

Please note: The super contributions that you make count towards your relevant contributions caps. Also, the insurance premiums can erode your super retirement savings if you don’t make extra super contributions to negate the cost.

• Benefit payment. In addition to meeting the TPD insurance policy claim definition, you must meet the permanent incapacity condition of release before the super fund trustee can pay the benefit payment to you, which means the trustee must be satisfied that you have a permanent medical condition that is likely to stop you from ever working again in any job you were qualified to do by training, education or experience. The insurer pays the benefit payment to the super fund trustee first, then the super fund trustee pays the benefit payment to you (your super account). Also, the benefit payment can be assessable for tax purposes in certain situations, for example, where you choose to have the benefit payment paid from your super account as:
  • A lump sum. Tax may be payable on the withdrawal if you are under age 60.
  • An income stream. Tax may be payable on the pension payments if you are under age 60.

Please note: With regard to a super ownership structure, unless you actively opt-in to maintain your TPD insurance policy, your cover may be cancelled if, for example, your super account becomes inactive for 16 months or more, or your account balance falls below $6,000.

In comparison to super, with regard to a TPD insurance policy with a non-super ownership structure:

• Insurance premiums. You can’t claim insurance premiums as a tax deduction, therefore the insurance premiums payable must be funded with your after-tax dollars.
• Benefit payment. You need only meet the TPD insurance policy claim definition for the insurer to pay the benefit payment to you and there is no need to meet the permanent incapacity condition of release. Also, the benefit payment is not generally assessable for tax purposes.

After reading this article, you may also find of interest the following:

• Super-linked TPD insurance.
• Underinsurance in Australia.
• Protecting your Super Package.
• TPD insurance claim definitions.
• Personal insurances and managing risk.
• The prevalence, incidence, risk and cost of burden of ill health.

If you have any questions regarding this article, please contact us.

*The Institute of Actuaries of Australia (2000). Interim Report of the Disability Committee.

^Actuaries Institute, Actuaries Summit. Super, Life and General meet at the Crossroads.