Paying for insurance with rollover money

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1 Paying for insurance with rollover money Since the launch of rollover payment facilities, like CommInsure s Super Payment Method under Total Care Plan Super, advisers have increasingly placed their clients insurance inside super. This improves their clients cash flow and provides them with an alternative option where affordability is a concern. Funding insurance from super rather than disposable income eases pressure on the clients budget whilst ensuring they keep their cover in place. Similarly, using super contributions from a pre-taxed source rather than after-tax disposable income may provide cash flow benefits due to potential tax savings. Since 1 January 2014, the super industry has moved to processing rollovers electronically. As a result, premium payments can now be requested and receipted by CommInsure automatically for clients. It s this appeal of an ongoing, automatic payment mechanism through an integrated solution with a client s super account that has prompted CommInsure to further expand the Super Payment Method now accepting rollover payments from any complying super fund. In this document, we address some of the questions that advisers often ask us regarding paying insurance premiums with rollover money, such as: how does the Super Payment Method (SPM) actually work? what happens in the second policy year under the SPM? is the SPM an automatic payment facility? what are the advantages of the SPM? is all insurance in super the same? what are the options for linking cover inside and outside super? what are some of the options for Self-Managed Super Funds (SMSF)? are there continuation options for my client to transfer their cover out of super? Important information: This information was prepared by The Colonial Mutual Life Assurance Society Limited ABN AFSL (CMLA) which is a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN and Colonial Mutual Superannuation Pty Ltd ABN AFSL , the trustee of the Colonial Super Retirement Fund ABN (CSRF). It is for the use of advisers and staff only, and is not to be issued, reproduced in whole or in part, or made available to members of the public. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Neither CMS nor CMLA are registered tax (financial) advisers under the Tax Agent Services Act 2009, and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law. For further information on each of the products included in this guide, please refer to the relevant product disclosure statement and policy. This information may be subject to change at any time without prior notice. CommInsure is a registered business name of CMLA

2 Part 1 paying for insurance with the Super Payment Method (SPM) So how does the Super Payment Method actually work? CommInsure s Super Payment Method is the facility that enables payment of premiums for a Total Care Plan Super policy using super rollover money. Let s say your client has a Total Care Plan Super policy with Life, Total Permanent Disability (TPD) Cover and income protection cover and they are paying for this using their super account. Let s also say that their main super account is with a known super fund, for example AMP, Colonial First State, CBUS, or Australian Super etc. To pay a policy premium using money from their super account, the client simply needs to complete and send CommInsure a Super Payment Rollover Authority form, which includes the: super fund s name super product name + Unique Super Identifier (USI) member s account number. This authority acts similarly to a direct debit authority, allowing CommInsure to act on behalf of the client to request a rollover payment from their super account as and when a policy premium is due. Diagram to show how CommInsure s Super Payment Method works Step 1 is only required to set up a policy with the Super Payment Method. For steps 2 and 3, the e-rollover request and receipt automatically occurs at each time a policy premium is due. If I set my client up with the Super Payment Method, what happens from the second policy year? The rollover authority your client has with CommInsure is enduring. At each policy renewal, CommInsure will send the client a policy anniversary letter with any newly indexed sum insured amounts and total premium payable. Under the Super Payment Method, CommInsure will send an electronic rollover request to the client s nominated fund for a rollover amount sufficient to pay the annual policy renewal premium. This is repeated each year the policy remains in-force until the client changes their payment preference and/or cancels their rollover authority.

3 Is it an automatic payment facility? Yes, if all requirements have been met. The request and transfer of rollover money between Total Care Plan Super and your client s nominated paying fund is all done electronically, so the Super Payment Method can be automatic for ongoing premium payments. However, the Super Payment Method is not automatic where intervention is required from the adviser and client to assist with any problems or extra information required from the nominated paying fund. An example of an error would be where the client s account has insufficient funds or their Tax File Number or account number is incorrect. Some funds also require additional evidence of client identification. This will need to be provided directly by the client to their nominated paying super fund. Should an error be identified, CommInsure will contact the adviser and client with details of the error, and suggest actions to resolve it. What are the other advantages of the Super Payment Method? Once the Super Payment Method is up and running, your client will not need to arrange payment of their insurance premiums each year. Paying a Total Care Plan Super policy with rollover money also means that your client can receive an up to 15 per cent rebate on their next policy premium, making insurance even more affordable. This is calculated on the previous year s premium amount paid with rollover money and is deducted from your client s total premium for the upcoming year. The net premium amount will be the amount requested from the nominated paying fund please see the Paying your premiums section within the CommInsure Protection Combined Product Disclosure Statement (PDS) and Policy. What happens to the Super Payment Method if my client transfers their super account to another fund? Your client s Total Care Plan Super policy can be updated with their new super account details - a new rollover authority simply needs to be completed and submitted. CommInsure will request the funds from the new super account from the next policy premium due date (as per steps 2 and 3 shown in the Super Payment Method diagram above).

4 Part 2 insurance in super Why is retail insurance in super appealing? Isn t all insurance in super the same? While a large number of Australians have their insurance through their super, they may only have default sum insured levels which is often not enough to fully meet their needs. Insurance through super plans may also be tied into employment arrangements, which means that if your client ceases or changes employment, they could be at risk of losing their insurance cover. Similarly, if they consolidate their super under a different super plan, they also run the risk of not being covered under their new super plan or having reduced cover. Retail insurance can complement your client s existing insurance arrangement in a number of ways: As a top-up strategy where existing sum insured levels under the super plan are not enough to meet client needs. CommInsure s income protection cover can be purchased with a two year waiting period and to age 65 benefit period. This will provide extra cover where group salary continuance arrangements have only a two year benefit period; and if the client s group salary continuance cover ceases, CommInsure s income protection has an in-built upgrade facility for the client to switch their waiting period from two years to three months without further underwriting. Should your client ever lose their insurance under their super or employer plan; the retail insurance remains in place until such time the client decides to cancel or the cover simply expires (e.g. age 80 for Life Cover under Total Care Plan Super). In addition, retail insurance in super is also guaranteed to be renewable; meaning the terms and conditions of the cover when purchased cannot be altered by the insurance provider to the point where the client s cover is less than what they were covered for before the change. Insurance purchased through super schemes or corporate plans are usually not guaranteed renewable, which means that they can be changed and may end up providing the client with inferior cover. Retail insurance offers in and out of super linking options Cover linking options are also available, providing broader choice and more comprehensive cover. Clients can flexi-link to covers not allowable under super, such as Trauma Cover and Total and Permanent Disability (TPD) with an own occupation definition. Flexi-linking enables clients to purchase packaged priced insurance across super and non-super policies under one policy fee. Similarly, Split TPD Cover provides clients with the advantage of having part of their TPD under super, linked to the more generous TPD own occupation definition outside super. What options are there for SMSFs? Typically a Self-Managed Super Fund (SMSF) would want to hold insurance for members directly within the fund. Earlier this year, CommInsure launched the SMSF Plan tailored specifically for this segment, providing a no-hassle solution which aims to align with the SIS Act s conditions of release. The SMSF Plan includes a suite of covers including Life Cover, Accidental Death Cover, TPD Cover (rider, split and stand-alone) and income protection (standard and accident only options).

5 The SMSF Plan can be funded from contributions directly from the member or as a direct debit transfer e.g. from a SMSF cash account. The trustee would then generally claim a tax deduction of up to 15 per cent for the premiums paid as part of the SMSF annual tax return. In some instances, such as for estate planning purposes, a member may wish to have their insurance outside the SMSF but still within super. Total Care Plan Super is a solution for this situation. Premiums can be paid via rollover from the members SMSF account. As SMSFs are not typically set up for electronic rollovers, the Super Payment Method is not available to SMSF accounts. This means that CommInsure can still accept rollover money from the SMSF, however your client will be required to organise the rollover payment directly from their fund each year. The client may be eligible to receive up to a 15 per cent renewal reward from the first policy anniversary. Are there continuation options for my client to transfer their cover out of super? Yes. If it s no longer suitable for a client to have their insurance in super, our Total Care Plan Super policy has an in-built continuation option for a client to transfer their Life Cover to an ordinary policy up to age 74 or their TPD and income protection cover to an ordinary policy up to age 59. Considerations for advisers Since 1 July, the landscape for insurance in super has changed. Advisers should be aware of the specific changes to insurance definitions and compare insurance cover options and definitions to outside of super insurance products. More information on the changing super landscape can be found here. There are also tax considerations in using rollover money to pay for insurance in super. Transfers may alter the taxation of some contributions and could alter the eligible service period necessary when working out the tax payable on claimable benefits. This in turn can deny access to a potential tax saving amount (anti-detriment payment). The time horizon of a client s insurance needs and projected premiums need to be included in the short and long-term objectives of the client and what impact paying premiums from their super account may have on their overall retirement wealth. Total Care Plan Super policies must be set with an annual premium frequency when paying with rollover money and may not fulfil a client s dollar cost averaging objectives when drawing down from super money. Some super funds have restrictions on the number of partial rollovers they allow a member to make in a 12 month period. CommInsure s Total Care Plan Super only requires a single rollover payment per year; even where the client has lump sum as well as income protection covers under their policy.