Jason Hurst, a technical superannuation specialist and commentator for the Knowledge Shop, said in a recent webinar that although most terminal illness cover has now moved to a 24-month period, some older covers still operate on a 12-month time frame.
A terminal illness is generally defined as the diagnosis of an illness which, in the opinion of a medical specialist, is likely to result in your death within the next 12 months to 24 months (depending on your product disclosure statement), regardless of any further treatment.
“Terminal illness generally won’t be its own standalone policy. It’s normally a feature of the life policy,” said Hurst.
“Where someone is unfortunately diagnosed as being terminally ill, they may receive their life payout a bit earlier while they’re alive, which allows them to plan and do a few things that they might want to do.
“The condition of release is that there need to be medical certificates, including one from a practitioner that specialises in the particular field of the injury or illness. For a trustee to release funds under the terminal medical condition, they need two registered medical practitioners to certify that this person has less than 24 months to live.”
Hurst said the previous life expectancy period was changed from 12 months to 24 months in 2015; however, some policies may not have been updated in accordance with this change.
“You may still find, hopefully, most insurance policies these days will pay out at that 24-month mark if they’re owned by larger super funds, but some insurance policies still have a 12-month definition,” he said.
“If that is the case, you would not want to close someone’s super fund, even if they can access their super benefit at 24 months, if their insurance is yet to pay. You might want to do partial terminal illness commutations, and then make sure that the fund, whether that be an SMSF or a retail fund, has enough money in it to keep the fund open and keep that insurance.”
He continued that if a policy did not have a terminal illness benefit and only had a death benefit, it is best to leave that policy in place and keep the fund open so that the policy will pay out after death.
“You should keep an eye on the insurance when someone is looking to make a full withdrawal. If the insurance has been paid, then it’s not such an issue, but if you’re still waiting on the insurance, you would want to keep the account open,” he said.
However, he warned it is necessary to also consider how the insurance is paid out, whether through a lump sum or an income stream, taking into account tax consequences.
“As an example, if a trustee has satisfied that the terminal medical condition has been met, you can’t roll over the funds; they need to be taken out or left in that fund,” he said.
“If you try to roll over those funds, that can cause problems, especially if the fund sends the amounts to another fund as a cash transfer, as it could be a non-concessional cap issue depending on its size. Be very careful with rolling over. If someone did want to roll over their fund, they probably should do that before they go through the terminal medical process.”
