Your income throughout your working life is a key financial resource, it allows you to fund your lifestyle expenses and work towards achieving your financial goals and objectives, now and in the future.
Therefore, it’s important to understand that in your working life, you have a 1 in 3 chance of being disabled for more than 3 months*. And unfortunately, coupled with this, if you were to be off work for:
1. ’20 days, the chance of ever getting back to work is 70%.
2. 45 days, the chance of ever getting back to work is 50%.
3. 70 days, the chance of ever getting back to work is 35%’^.
In the event that you were to become totally and permanently disabled due to a sickness or injury and unable to work again, a total and permanent disability (TPD) insurance policy could play a vital role.
For example, upon a successful claim, a TPD insurance policy would provide you with a lump sum benefit payment, which depending on your personal circumstances, could assist with one or more of the following:
Notably, when establishing a TPD insurance policy, it’s important to choose the most appropriate ownership structure for you. In terms of ownership structure, this can include the choice between having your TPD insurance policy held inside or outside of super (super or non-super).
There can be advantages and disadvantages to each ownership structure. Below we provide an overview of this from a claim definition and tax treatment (insurance premiums and benefit payment) perspective.
Please note: We cover these ownership structures in terms of the following:
With this said, there are two main types of TPD insurance policy claim definitions that insurers offer:
With the above in mind, when looking at a super ownership structure, from 1 July 2014, a TPD insurance policy with an ‘own occupation’ claim definition is no longer able to be held inside super. However, grandfathering provisions do apply for relevant TPD insurance policies that were established prior to this date.
In contrast to super, there are no TPD insurance policy claim definition restrictions placed upon a non-super ownership structure. However, it’s important to note that some insurers do offer super-linked TPD insurance.
In a nutshell, super-linked TPD insurance can allow you to obtain an ‘own occupation’ claim definition as well as many of the other benefits associated with holding personal insurances inside super (see below).
In terms of TPD insurance policy tax treatment, there are several things to consider, for example, the tax treatment of not only the insurance premiums payable but also the benefit payment itself.
With regard to a TPD insurance policy within a super ownership structure:
Please note: The super contributions that you make count towards your relevant contributions caps. Also, the insurance premiums can erode your super retirement savings if you don’t make extra super contributions to negate the cost.
Please note: With regard to a super ownership structure, unless you actively opt-in to maintain your TPD insurance policy, your cover may be cancelled if, for example, your super account becomes inactive for 16 months or more, or your account balance falls below $6,000.
In comparison to super, with regard to a TPD insurance policy with a non-super ownership structure:
After reading this article, you may also find of interest the following:
If you have any questions regarding this article, please contact us.
*The Institute of Actuaries of Australia (2000). Interim Report of the Disability Committee.
^Actuaries Institute, Actuaries Summit. Super, Life and General meet at the Crossroads.