TPD Insurance changes inside superannuation
The following information on insurance in super refers specifically to TPD Insurance.
On 13 October 2009, the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, announced an amendment to the tax law to provide transitional relief to complying superannuation funds for the deduction of insurance premiums for disability superannuation benefits (TPD benefits).
What does this mean in the real world? Until 30 June 2011, any TPD insurance premium paid by the trustee of superannuation funds to an insurance provider will receive a full tax deduction.
Superannuation funds & 'Own Occupation' definitions of TPD Insurance
From 1 July 2011, in order to receive a tax deduction the trustee must meet the strict superannuation disability benefit definition of, 'a benefit that is paid to a person because he or she suffers from ill-health (whether physical or mental), and two legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.'
This means that 'loss of limbs and sight', 'loss of independent existence', and 'own occupation' benefits will not be entitled to a tax deduction after 1 July 2011.
- Own occupation definition of TPD states that, "the person is incapacitated to such an extent that it is unlikely that he or she will be able to engage in his or her own occupation ever again".
- Loss of limbs and sight definition of TPD states that, "the person has sustained, as a direct result of injury or sickness: the complete and irrecoverable loss of use of both hands; or the complete and irrecoverable loss of use of both feet; or the complete and irrecoverable loss of use of one hand and one foot; or blindness in both eyes, whether aided or unaided; or the complete and irrecoverable loss of use of one hand and blindness in one eye, whether aided or unaided; or the complete and irrecoverable loss of use of one foot and blindness in one eye, whether aided or unaided."
- Loss of independent existence definition of TPD states that, "there is a permanent and irreversible inability to perform without the assistance of another person any two activities of daily living (dressing, toileting, feeding, maintaining continence, and mobilising) or all of the defined home duties (cleaning, preparing meals, purchasing food, washing and ironing)."
Where these additional benefits exist, the trustee will require an actuarial certificate each year to show how much each of these benefits cost.
Let's look at an example. A man has a self-managed superannuation fund (SMSF) that owns a $500,000 sum insured 'own occupation' TPD policy on the life of the insured (male, aged 40, accountant).
Until 30 June 2011, the fund can claim the full 'own occupation' TPD premium of $469 as a tax deduction. This equates to a tax savings of $70.35 (15% x $469). From 1 July 2011, the fund will only be able to claim the equivalent value of an 'any occupation' TPD premium, or $334, as a tax deduction. This will reduce the tax savings within the fund to $50.10 (15% x $334). As the premium is not fully tax deductible, the trustee will need to pay $20.25 to the ATO if the premiums were paid with concessional contributions. In an 'insurance only' superannuation fund, this taxation liability may result in higher premiums to the members. In super funds that have assets, this taxation liability will result in lower net returns due to higher insurance costs (due to taxation).
Individuals who already have an 'any occupation' policy within their SMSF will need to review the policy terms, benefits, and features. From 1 July 2011, having more features and benefits within the TPD policy is not necessarily better.
For superannuation funds: What does this mean to pricing and product design after 1 July 2011?
One of three things will occur:
1. TPD benefits and features within superannuation will remain the same, and the increased administration costs and reduction in tax deductibility to the trustee of the superannuation fund could be passed along to the members in the form of increased premiums or reduced investment returns (due to an increase in expenses).
2. TPD benefits and features within superannuation could get stripped back to reflect the strict “superannuation disability definition under SIS Act. This could result in premiums remaining stable or possibly reducing as fewer benefits are being provided.
3. TPD benefits and features within superannuation may get stripped back to reflect the strict 'superannuation disability definition' under SIS Act, and connected benefits outside of superannuation for the same person will provide 'own occupation', 'loss of limbs and sight', and 'loss of independent existence'.' Bowen believes that this relief will provide the superannuation industry with enough lead time to make the necessary administrative changes. Let's hope this is correct!
Trustees of superannuation funds
Over the next 19 months, trustees of superannuation funds need to review TPD benefits. It may be necessary to increase premiums, or modify benefits, or reduce investment returns in order to comply with the more stringent rules that commence on 1 July 2011.
Advice on life or TPD insurance inside or outside your superannuation fund
If you would like advice on life insurance and/or TPD insurance in super (or outside of super), then contact an xLife adviser. We can help you weigh up your options and help select solution best suited to your situation.
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September 2011
