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Who is the Owner of Life Insurance Policies?

Where an insurance policy for death and/or total and permanent disability (TPD) insurance is held within a superannuation fund, either in respect of a group of superannuation fund members or an individual member, the owner is the Trustee of the superannuation fund.

Where an insurance policy is held outside of superannuation, the owner of the policy is as specified in the policy document. It may be the life insured or another party.

Where the life insurance policy is held within a superannuation fund, upon the death of a member the proceeds of the life cover policy will be paid to the Trustee of the superannuation fund. Generally the Trustee of the superannuation fund will then pay death benefits to the member's beneficiaries. The benefit will generally equal the proceeds of the policy together with the value of the member's accumulated benefits immediately prior to death.

Upon the member suffering total and permanent disablement (TPD), the life insurance companies will need to be satisfied that the member meets the definition and terms of total and permanent disablement as per the insurance contract. If the Insurer decides that the member does meet the terms of the contract, the insurer pays the policy proceeds to the Trustee of the superannuation fund.

The Trustee of the superannuation fund then needs to determine if the member satisfies the definition and terms of total and permanent disablement within the terms of the trust deed in order for the Trustee to pay a disablement benefit. The trust deed will generally contain a disablement clause that deals with what constitutes total and permanent disablement and what benefit is payable in such circumstances. The benefit payment clause will generally refer to the total of the member's accumulated superannuation plus any insurance proceeds. Both of these amounts make up the member's full TPD entitlement and the Trustee will determine whether the member is entitled to the benefit.

In addition to the decision of whether the member is entitled to receive the benefit, is whether the member can be paid the benefit subject to the preservation rules.

The Superannuation Industry Supervision (SIS) Regulations contain specific rules outlining that preserved benefits can be accessed if a "condition of release" has been met. All the conditions of release are detailed within Schedule 1 of the SIS Regulations.

Permanent Incapacity is a condition of release within SIS and is defined within SIS subregulation 6.01(2) as:

"permanent incapacity, in relation to a member who has ceased to be gainfully employed, means ill-health (whether physical or mental), where the trustee is reasonably satisfied that the member is unlikely, because of ill health, ever again to engage in gainful employment for which the member is reasonably qualified by education, training or experience"

It is up to the Trustee to obtain a standard of proof which enables them to be reasonably satisfied that the above condition has been met, allowing the preserved benefit to be paid. If the Trustee is satisfied that the standard of proof is met the preserved benefit (at the time of assessment) becomes unrestricted non-preserved and can be accessed by the member. Where this occurs, SIS subregulation 6.18(3) allows the member to access the benefit as either:

• One or more lump sums;
• One or more pensions;
• The purchase of one or more annuities; or a combination of each of these.

Ref: SIS Regs 1994, Schedule 1, Regulation 6.01(2), Regulation 6.18(3)

Note: It is important to note that if a superannuation fund member chooses not to cash out part or all of their benefit and leaves that portion in the fund, any earnings will be fully preserved. Therefore, a request for future access to the money will only entitle the member to cash up to the amount that was released from preservation at the time of the initial assessment. The superannuation fund member will need to satisfy a further condition of release to access any additional funds that represent the earnings.

If the member chooses to cash out part or all of their benefit upon successful completion of TPD, the total benefit (accumulated superannuation and insurance proceeds) will be paid from the fund based on the member's respective eligible service period. Tax may be payable subject to the component structure of the lump sum (or pension) which is to be paid.

Note: An invalidity component per section 27G of the Income Tax Assessment Act 1936, is generally only payable from a standard employer sponsored superannuation fund.

Ref: ITAA 1936, Section 27G

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December 2009