How to overcome the hidden costs to you and your family with death and disability insurance in super (with little to no impact on your cashflow)

Look, I know it's not the most exciting topic for most, but it's pretty damn important.

In your super, you can be covered for death, permanent disablement, and temporary / partial disablement.

Your super fund might provide this by default, or you might have even applied for it.

It doesn't matter - if you have insurance with your super fund, this applies to you.

The intent of this post is to specifically distinguish the fundamental differences between death & disability insurances in super and outside super, why it matters, and what to do about it.

Let’s face it.

When you pay for insurance, it’s only so you can make a successful claim when you need it.

And you only insure the things that have value.

In this case, we're talking about YOU.

Let me be clear, first and foremost.

NOT ALL INSURANCE CONTRACTS ARE THE SAME

HOW YOU PAY FOR YOUR INSURANCE MATTERS

Refer to my recent post about AustralianSuper’s changes to TPD insurance as a prime example.

How you pay for your insurance can impact:

- The conditions required to successfully claim

- The conditions required to access the money

- How tax is paid

- How much tax is paid

THE TWO MOST COMMON PAYMENT METHODS

1. Superannuation (your super fund pays for it)

2. Personally (you pay for it)

When you have death or disability inside superannuation, you’re at the mercy of:

- Superannuation laws

- Superannuation fund Trust Deed

- Superannuation trustee discretion

- Changeable insurance contract terms (no matter how long you’ve held cover with the super fund)

I’ll explain how each benefit type is affected when in super vs not in super, so you can make an informed decision about whether you're comfortable with the applicable risks.

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DEATH COVER

If you pass away with life insurance / death cover in your super, it will be added to the existing balance of your super before being paid out.

If you want your life insurance + super to be paid to a specific person, they must be a ‘dependant’ under superannuation laws.

If you don’t have a ‘binding’ beneficiary nomination, the trustee of the super fund will ultimately determine who is entitled to receive your super + life insurance money.

Further, there could be tax withheld if the recipient is not a ‘dependant’ under tax law.

If you pay for life insurance personally, the insurer is required to continue providing the same contract terms (or improvements which do not result in increased costs) as long as you keep paying your premiums. You can nominate any party, and there is no tax payable on the life insurance benefits paid.

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TPD COVER

If you satisfy your super fund’s policy terms for Total & Permanent Disability (TPD), and the insurer accepts the claim, a lump sum is paid to your super account.

Because the lump sum is added to your super (not paid to you directly), you must also meet a ‘condition of release’ to access your super before you can get access to the money.

In most cases, if you meet the conditions of the TPD policy, you meet the superannuation law definition for an early release of super under ‘permanent incapacity’ grounds.

If, for some reason, you don’t meet the superannuation law requirements for ‘permanent incapacity’, the money will have to stay inside your super until you meet another ‘condition of release’ to access your super.

Even if you do meet the permanent incapacity requirement upfront, the trustee of the fund may require ongoing proof that you’re permanently incapacitated if you don’t withdraw all of the money within a specified time period.

Recap so far: A successful claim with the insurer is step one. Accessing the money is step two, which requires the trustee of the super fund to authorise the release of funds.

If you’re withdrawing your super before the age of 60, you’re highly likely to have tax withheld on the lump sums paid to you. If you get expert financial advice, we can help you minimise or completely overcome any potential tax liability.

SIDE NOTE: Super funds typically ‘link’ your TPD and Death cover, so if you claim on TPD, your death cover ceases. It also means you may not be able to have standalone TPD cover – you’ll be forced to always have at least the equivalent amount in Death cover.

If you pay for TPD premiums personally, you only need to have the insurer accept the claim. There is no tax payable on the TPD lump sum paid to you. You may also be able to access more lenient definitions for what defines ‘TPD’ because the superannuation restrictions don’t exist.

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INCOME PROTECTION / SALARY CONTINUANCE

If you satisfy the policy terms, which may involve a reduction in income and/or inability to do the duties of your pre-disability income (or any occupation you’re reasonably suited to, depending on the policy wording), either wholly or partially, the insurer pays you a monthly benefit to help replace lost income.

When cover is held in super, the insurer must accept the claim and agree to continue paying monthly benefits.

The trustee must also release those monthly benefits to you, so you will need to continue to satisfy both the insurer and trustee that you qualify under the policy terms + under superannuation laws.

If you were unemployed or on unpaid leave at the time your ability to work was affected (i.e., your ‘date of disablement’), you may not qualify for benefits to be paid to you due to superannuation laws. This is because you were not ‘gainfully employed’ at the date of disability, and didn’t have pre-disability income to be replaced.

If you pay for your Income Protection personally, you only need to have the insurer accept the claim (initially and ongoing), based on your policy terms. You may still be able to receive income protection payments even if you were unemployed or on unpaid leave at the date of disablement.

THE IMPORTANT POINTS ABOUT DISABILITY COVER THAT APPLY TO HEALTHCARE PROFESSIONALS

TPD

If you are unlikely to ever return to your pre-disability occupation, but are reasonably suited to another occupation – even if you could only do that other occupation part-time – you are very unlikely to successfully claim.

If the disability isn’t serious, this might involve you shifting to a supervisory, teaching or administrative role, rather than your usual role.

If your disability prevents you from doing any of these, but you’re now involved in other work when you make a successful claim, you may not be able to access the money paid into your super account due to not meeting the ‘permanent incapacity’ definition.

INCOME PROTECTION

If you’re between jobs, on unpaid leave, or taking a break due to personal / family reasons, you’re highly unlikely to be able to make any kind of claim.

If the terms of your insurance offered by your super fund change, this could make it more difficult to claim on in the future.

Given your ability to produce an income is your greatest asset, it’s important not to leave it to chance.

HOW DOES A FINANCIAL ADVISER HELP?

Financial advisers have the ability to structure policies with a bit of a ‘hybrid’ approach, where your superannuation fund pays for the core benefits, and you only pay for the difference in cost for the benefits that can’t be held inside super.

For example, if you’re paying $1,000 for your insurances personally, the super fund might pay $700 and you only pay $300 (as an example).

With your TPD cover, your super fund can pay for the ‘Any Occupation’ definition, which refers to your ability to do any occupation you’re reasonably suited to based on your education, training and experience, and you only pay the difference in cost for an ‘Own Occupation’ definition, which refers to your ability to do the occupation you were engaged in immediately prior to disablement.

We can also give advice about how to minimise (or completely overcome) the potential tax implications during a claim.

Having an 'Own Occupation' TPD definition protects your ability to do the professional occupation you spent years and $10,000s in education costs to be able to do, and is likely a higher paying occupation than the alternatives (if any) following a claim.

Some insurers offer outside-super benefits for Income Protection at no additional cost, so if you aren’t able to be paid due to the superannuation limitations, but you still satisfy the policy terms, the insurer will pay the benefits directly to you without any superannuation involvement.

If you pay for Income Protection personally (wholly or partially), the premiums may be up to 100% tax deductible, which basically means you’d probably get around 1/3 of the premiums you pay back at tax time.

Importantly, your existing super fund should still be able to pay for any superannuation-owned policies your adviser sets up for you, except you’ll no longer be restricted to just the insurance cover offered by your super fund.

WHAT’S THE PROCESS?

You and your financial adviser will work out and agree on your ‘needs’, and advice will be given based on your circumstances & goals.

This involves:

1. Determining whether any pre-existing medical conditions will affect your ability to get cover without any special conditions

2. Determining which benefit types you need, and how much cover you should have, which can be easily reviewable as your life circumstances evolve

3. Determining how to structure your cover – whether to put some or all of your cover through your super, and whether to ‘link’ any benefits to reduce costs

4. Choosing the right insurer to ensure the policy terms are reasonable to help at claim time

If you’ve been relying on the insurance offered by your super fund, you've sourced your own insurance directly from an insurer, or you’ve not had an expert review what you have, you’re probably paying more than you should for what you have, and it’s probably not enough to actually provide for you when you need it.

Need more info? Let's have a chat.

GENERAL ADVICE DISCLAIMER:

This information is for general information purposes only and is not (and cannot be construed or relied upon as) personal advice. No investment objectives, financial circumstances or needs of any individual have been taken into consideration in the preparation of the content. You should always obtain professional advice to ensure products and strategies are suitable for your circumstances.