Insurance within super
Total and Permanent Disablement Insurance
Total and permanent and disablement (TPD) cover is a lump-sum benefit payable on the total and permanent disablement of an insured person. Life term life (death cover), it is possible to fund total and permanent disablement insurance via superannuation.
A total and permanent disablement means the insured is never able to work again in either:
- an occupation reasonably suited by training, occupation or experience, or
- their own occupation, for instance the occupation they where employed prior to disablement.
Similar to the death cover, a member is provided with funds to clear debts, provide an ongoing income stream (if required), fund any lifestyle changes such as home modifications due to disability (e.g. replacing stairs with ramps), and pay for any unexpected medical costs that may not be covered by health insurance cover.
Definition of TPD
TPD any occupation - this means insurance against the member suffering an illness or injury that is likely to result in the member's permanent inability to work in a job for which the member is reasonably qualified by education, training or experience.
TPD own occupation - this means insurance against the member suffering an illness or injury that is likely to result in the member's permanent inability to work in the member's own occupation.
|Hint: 'Own occupation' TPD permanent incapacity
Members need to be aware that certain types of insurance, such as 'own occupation' TPD, there is a chance for a mismatch between the insurance policy definition (which determines when insurance proceeds can be paid to the fund trustee) and the superannuation law definition of permanent incapacity. There's a high chance that the insurance proceeds held inside super wont be paid out to the member because they were unable to satisfy a condition of release in order to receive a benefit immediately.
However, changes to superannuation regulations that came into effect on 1 July 2014 meant that superannuation fund trustees are not able to take out 'own occupation' TPD insurance from the 1 July 2014 and onwards.
For any 'own occupation' TPD cover that was in place prior to 1 July 2014, consider restructuring the cover so that the part of the cover that is aligned with the permanent incapacity definition is held inside super and the remainder is held outside super.
This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.
Last modified: Wednesday, August 25, 2021