Jason Hurst, technical superannuation specialist at the Knowledge Shop, said in a recent webinar that conditions of release and insurance rules can differ slightly depending on whether the client has an SMSF or a retail or industry fund.
“We all know that there are retirement conditions of release. Clients usually hope to retire and access their funds as a lump sum or a pension. But there are also conditions of release for unfortunate events like death, terminal illness, permanent incapacity and temporary incapacity,” Hurst said.
“We have what is called nil cashing conditions of release, and that generally gives the member or the beneficiary the ability to cash the entire benefit, usually in the form of a lump sum or pension, depending on the beneficiary.”
“Death, terminal illness and permanent incapacity are nil cashing conditions and release and a lump sum or a pension is potentially available. Temporary incapacity is a little bit different and allows someone temporarily ill or injured to start a non-commutable income stream to try and replace their pre-disability earnings. That will only be in the form of a pension.”
Hurst added that a member who has only met a temporary capacity condition of release might be able to access some benefits in the form of a pension, but usually, that will require the fund or the member to have some form of income protection or salary continuance insurance to fund that income stream.
He continued that any insurance payout has to go back into the fund, as it is the fund that owns the policy.
“Insurance always initially forms part of the taxable element. That may change when benefits are accessed, but it always forms part of the taxable element. Insurance proceeds are taxed when received by the super fund,” he said.
“In thinking about insurance cover in super in general, each of our conditions of release might include insurance, but they don’t have to. So if someone passes away, they may have a super benefit or some insurance. It is the same if a member becomes permanently disabled – they may access what they had in super.”
However, he added, temporary incapacity generally relies on an insurance policy.
Hurst said in July 2014, rules around insurance were changed and new policies must now align under the SIS condition of release and one of the four conditions of release.
“That allows you to take out life cover that easily aligns with death as a condition of release. A super fund can take out a terminal illness policy on a member and that’s usually part of a life policy and is normally not a standalone policy,” he said.
“But these days, a lot of life insurance policies will pay out if the person injured is terminally ill.”
If a client is considering taking TPD insurance in super it needs to be “any occupation”, however, there is another type of TPD insurance called “own occupation” that might cover someone unable to carry out their occupation.
“People can still get that type of insurance cover outside of super, but they can’t take out ‘own occupation’ policies inside super post-2014, although advisers may still come across some existing ones, as they may with trauma or critical illness.”
He said trauma and critical illness policies generally pay out on a certain medical event such as a heart attack or medical event, and no condition of release states the person needs to be disabled or temporarily or permanently disabled under those policies.
“If you have one of those events and you’ve got medical evidence, then you will get a payout, but once again those trauma and critical illness policies can’t be taken out in super anymore.”
Just in relation to this point, “Insurance always initially forms part of the taxable element. That may change when benefits are accessed, but it always forms part of the taxable element. Insurance proceeds are taxed when received by the super fund,” he said.
Would just like to point out that if in the rare chance, the insurance is part of pension phase and the premiums are paid from pension phase, the tax components of the insurance payout revert to the original tax components of pension interest as at commencement.
In the past, have seen some public offer funds offer insurance in pension phase and in SMSFs, if the situation warrants, it is possible to have insurance funded and attached to pension phase which may be advantageous for reversionary pensions from a transfer balance cap perspective.