Tim Miller, head of education for Smarter SMSF, said if a member is accessing a terminal illness insurance payment, it would be best to access it as a normal lump sum even though there would be no tax benefit if they are under preservation age.
“The introduction of the condition of release [with terminal illness insurance] was to cater for those that were more than permanently incapacitated and had not passed away yet, but had clearly been diagnosed with a terminal illness,” Miller said.
“Although that may not necessarily impact working capacity, it had a financial burden attached to it, so this terminal illness condition of release was introduced to ultimately say, with that financial burden, we want to alleviate any tax considerations or tax concerns that the individual will have.”
Miller said previous regulations stipulated that if a member was diagnosed with a terminal condition they could only access superannuation within a 12-month window, but that was expanded to two years.
“It takes a fair bit to get that sign-off from two medical practitioners, one who specialises in that field of the illness or injury, to certify the likelihood of the individual passing away inside that 24-month window,” he said.
“Then you can access your benefits as unrestricted benefits, so you can take it out, and it’s all non-assessable income. Unlike disability where there’s an uplift in the tax-free component, the componentry [in terminal illness] doesn’t change, but the full amount is withdrawn as if you’re over 60 with full access.”
Aaron Dunn, CEO of Smarter SMSF, said terminal illness payments also have a nil cashing condition, which means there is the opportunity to take payment as a lump sum, but it equally allows taking any combination of both lump sum and pension where it would be worthwhile.
“The income stream is important, but in a lot of instances, you need it for the adjustment to the individual circumstances, the fact that you may need someone to take on a carer role and be able to support you,” Dunn said.
Miller said if an SMSF is considering terminal illness insurance, it is important to check existing insurance policies first, as most have terminal illness clauses.
“They also have to understand that ability to get payments from a life cover point of view, to have that payment made earlier, which then gives the members, and the family, that financial safety net to know that superannuation is accessible at that point in time,” he said.
“They could also look at potentially the other tax benefits that might be available within the fund that the member, whilst they’re in a better capacity to make decisions, might be able to help the fund moving forward.”
