Insurance and Superannuation: an evolving relationship

Transcription

1 TO ANSWER QUESTIONS Insurance and Superannuation: an evolving relationship KATHERINE ASHBY BT THIS ARTICLE IS WORTH 0.50 POINTS CRITICAL THINKING Includes Stronger Super changes Four conditions of release Super-linked policies Superannuation has become the natural home for many Australian s life and disability insurance. This doesn t just refer to group insurance, but also to individual policies. At BT, in 2013, almost 40 per cent of Protection Plans policies purchased were owned inside a platform superannuation account. On top of this, we could add those policies owned by self-managed super funds (SMSFs), and those owned inside the non-accumulation Master Trust, which are often being funded by partial rollovers from other super funds. The considerable increase in cover being held inside super over the last decade, particularly individual cover, caught the attention of the Super System Review, which resulted in the Stronger Super reforms. Although most changes for Stronger Super have been implemented, one of the last will come into effect on 1 July 2014, and that is a limitation on insurance policies that can be purchased by trustees of superannuation funds hence restricting which cover can be owned and funded inside super. Stronger Super changes Superannuation Industry (Supervision) Regulation (SISR) 4.07D imposed a new operating standard, effective from 1 July 2014, as follows: A trustee of a regulated superannuation fund must not provide an insured benefi t in relation to a member of the fund unless the insured event is consistent with a condition of release specifi ed in item 102, 102A, 103 or 109 of Schedule 1. Therefore, this regulation prohibits trustees from purchasing insurance policies to provide coverage for Although most changes for Stronger Super have been implemented, one of the last will come into effect on 1 July 2014, and that is a limitation on insurance policies that can be purchased by trustees of superannuation funds hence restricting which cover can be owned and funded inside super. members other than those who are consistent with the conditions of release for death (item 102), terminal medical condition (item 102A), permanent incapacity (item 103) and temporary incapacity (item 109). This is important, as there is a difference between meeting any condition of release (ie, retirement age) versus meeting one of the above four specifi c conditions of release. The Explanatory Memorandum released with the regulations provides us with further detail of the intent behind this new operating standard. It states that along with prohibiting trustees from owning policies which may not be consistent with the above conditions of release, the insurance policy used must contain insured benefi ts that can, in all circumstances, be released to members. This has implications for insurers along with trustees. Many policies now offered inside platform super or non-accumulation Master Trusts have defi nitions which are, for the most part, aligned to a condition of release, but not to the degree required from 1 July. And for those offered for ownership through SMSFs, often the defi nitions more closely resemble a non-superannuation policy. As such, all insurers are currently working through amendments to the defi nitions of policies which will be available from next fi nancial year. The changes will apply for some insurers from the date of their upgrade. For other insurers, the defi nition changes may be specifi ed from 1 July or a Supplementary Product Disclosure Statement (SPDS) may be issued at that date. It is 28 FINANCIAL PLANNING APRIL 2014 www. financialplanningmagazine.com.au

2 CPD MONTHLY important to note that these new restrictions only apply to new policies. Conditions of release There are four relevant conditions of release: death (item 102), terminal medical condition (item 102A), permanent incapacity (item 103) and temporary incapacity (item 109). Three of those are defi ned in the legislation and provide a useful starting point for comparison. In addition, each cover type has varying degrees of changes required and varying degrees of complexity. Hence, we ll consider each individually. 1. Term Life Death or terminal illness is covered under term life policies. The defi nitions are for the most part consistent with conditions of release item 102 and 102A and hence not many changes will be necessary. Where there may be differences is in the ancillary benefi ts. Term life policies come with many additions, including fi nancial planning benefi ts and funeral advancement. Any ancillary benefi t that amount to an additional or different method of payment at claim time will likely need to be removed from super owned policies. Benefi ts that provide a right to alteration or sum insured increase are unaffected. 2. Total Permanent Disability (TPD) The amendment legislation contained a new defi nition for permanent incapacity (SISR 1.03C): a member of a superannuation fund or an approved deposit fund is taken to be suffering permanent incapacity if a trustee of the fund is reasonably satisfi ed that the member s ill-health (whether physical or mental) makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualifi ed by education, training or experience. There are implications for all TPD defi nitions inside super. First, and most obviously, Own Occupation TPD can no longer be purchased entirely inside super. Some planners may be surprised that this was still available, given super-linked TPD and the clear gap between the definition and a super condition of release. However, there are a number of circumstances where the strategy has still been useful, which we ll examine further below. Second, if you look closely at an Any Occupation TPD defi nition offered by many retail insurers, it includes a reference to earnings capacity. The defi nition states that the insured must be unlikely to work in an occupation they are suited to by education training or experience AND that would earn more than 25 per cent of pre-disability earnings. This allowed high income earners, in particular, more fl exibility at claim time. Let s say prior to disability the life insured was earning $400,000 per year and following disability, was able to work but unlikely to again be able to work in an occupation that would earn more than $100,000 per year. Utilising the 25 per cent earning clause, a claim would currently be payable. However, from 1 July, this earnings clause will need to be removed from all superannuation owned policies. Finally, even the non-working defi nitions of TPD do not survive unscathed. Policies regularly include coverage for inability to perform two activities of daily living, loss of use of limbs/ sight or signifi cant cognitive impairment. These defi nitions will need to take on a second component so that the insured must be, for example, unable to perform two activities of daily living and unlikely to engage in an occupation for which they are reasonably qualifi ed by education, training or experience. The changes have implications for new policies but also reviews and existing cover. Clients with existing coverage inside super will likely have more generous defi nitions than those available post 1 July. Planners will also need to be careful when comparing Any Occupation with Any Occupation, as the defi nitions will likely be different inside and outside of super, even with the same provider. These differences have not existed before and hence will require a heightened level of vigilance. 3. Trauma You may fi nd it surprising that trauma insurance (also known as Living, Critical Illness, Crisis or Recovery insurance, dependent on the insurer) is currently available through super. Most insurers do allow trauma to be purchased by SMSFs. Unlike TPD, this difference is fairly straightforward. Following 1 July, it is unlikely any insurers will continue to offer trauma inside Continued on p30 There are four relevant conditions of release: death (item 102), terminal medical condition (item 102A), permanent incapacity (item 103) and temporary incapacity (item 109). Three of those are defined in the legislation and provide a useful starting point for comparison. In addition, each cover type has varying degrees of changes required and varying degrees of complexity. FINANCIAL PLANNING APRIL

3 TO ANSWER QUESTIONS super. Furthermore, trustees will be prohibited from purchasing new policies. 4. Income Protection Income Protection relies upon the temporary incapacity condition of release. Temporary incapacity in relation to a member who has ceased to be gainfully employed (including a member who has ceased temporarily to receive any gain or reward under a continuing arrangement for the member to be gainfully employed), means ill-health (whether physical or mental) that caused the member to cease to be gainfully employed but does not constitute permanent incapacity. The legislation (SISR 6.01) allows for a noncommutable income stream to be released in the event of incapacity. Non-commutable income stream means a benefi t that: (a) cannot be commuted; and (b) is paid at least monthly; and (c) does not have a residual capital value; and (d) is such that the total amount paid each month is fi xed or varies only: (i) for the purpose of complying with the Act and these regulations; and (ii) during any period of 12 months by a rate not exceeding either (A) 5 per cent per annum; or (B) the rate of increase in the last Consumer Price Index (CPI). There are two main areas for concern to which insurers are seeking answers. The fi rst is the defi nition of pre-disability earnings. Pre-disability earnings or income is not currently defi ned, which gives insurers some fl exibility on how to calculate earnings. For example, should this be calculated over a year, or the last three years or perhaps even longer? Where insurers offer agreed value income protection, the ambiguity can give fl exibility to allow the release of benefi ts, although the client s income may have more recently dropped. A more restrictive interpretation would limit agreed value inside super. The second is the intent of the requirement to cease gainful employment due to sickness or ill health. If a strict interpretation of this defi nition is taken, it may mean those who are unemployed at the time of disability, or who are on unpaid leave, cannot claim under this provision as they do not have the ability to cease gainful employment. It is hoped Treasury will provide some guidance on this matter in the near future. Finally, it is worth noting that temporary incapacity specifi cally excludes permanent incapacity. If strictly applied, this may mean long-term income protection benefi ts could not be released under temporary incapacity. This will not, however, preclude these benefi ts from being offered, as it is only a requirement to meet one of the four conditions of release. Hence, permanent incapacity also allows for the release, in whole or in part, of superannuation benefi ts to the member. Last chance Although trustees are not permitted to provide members with new policies beyond the end of this financial year, existing policies may remain in force. In addition, those policies may be increased, decreased or altered in any way. A window of opportunity exists now that will close as each insurer updates their cover between now and 1 July to put this cover in place for your clients. There are two main reasons for doing so. The fi rst is when a client has reached preservation age and may access their superannuation because he or she may be retiring. In this case, if the insured was to meet an Own Occupation defi nition and have the claim proceeds paid into their super fund, they may access those funds by retiring. This strategy is more tax advantageous, of course, after age 60. For the most part, this strategy is motivated by cash fl ow and wanting to fund premiums using super monies. The second is whereby the aim is to pay off debts, increase assets and/or create liquidity within the super fund, rather than provide any immediate benefi t to the client. For example, an SMSF owns a property with debt against it. In the event of being diagnosed with a signifi cant disease or injury, such as cancer or a stroke, the debt needs to be paid down but there is no need for a benefi t to be paid from the fund. In this case, there is no concern about meeting a condition of release as the insurance proceeds are for purposes inside, rather than outside super. Super-linked policies Although policies inside super will now be more restrictive, it doesn t mean planners are precluded from accessing more comprehensive coverage and funding the majority of the premium from super. Insurance product design has developed considerably in the last fi ve years to allow super-linking. This builds on the original concept of fl exi-linking, whereby a term life Although trustees are not permitted to provide members with new policies beyond the end of this financial year, existing policies may remain in force. In addition, those policies may be increased, decreased or altered in any way. A window of opportunity exists now that will close as each insurer updates their cover between now and 1 July to put this cover in place for your clients. 30 FINANCIAL PLANNING APRIL 2014 www. financialplanningmagazine.com.au

4 CPD MONTHLY policy could be owned inside super and nonsuper rider benefi ts, such as TPD and trauma, could be linked, providing lower premiums than standalone cover. Super-linked TPD and Income Protection allows you to give your client the same level of coverage as an Own Occupation TPD policy or a blue ribbon Income Protection policy, while utilising super monies to fund the premium. The bulk of the cover, being the component that would satisfy a condition of release, sits inside super and those benefi ts which would become trapped, owned directly by the insured. Essentially you are splitting one policy between super and non-super ownership. For TPD, the Any Occupation component sits inside super, and the Own Occupation sits outside. TPD policies are relatively consistent between insurers and generally two-thirds of the premium can be funded from super. Income Protection can differ, with some insurers allowing the core policy to sit inside super and just the ancillary benefi ts to sit outside, and others only allowing indemnity cover inside super, with an agreed value top-up outside. For this reason, the premium split is not uniform and the portion to be funded outside super varies between per cent of the premium dependent on the insurer. Super-linked policies are a great solution to provide comprehensive coverage to clients with restricted cash fl ow. Given that you are recommending policies with benefi ts which cannot be offered inside super, these policies compare very favourably to group insurance. Other changes On a different note, the ATO recently released the new superannuation contribution caps for From 1 July, individuals under age 49 at 30 June 2014, will have an annual concessional contributions cap of $30,000. As previously legislated, from onward, individuals aged 49 and over at 30 June 2014 will be eligible to use the temporary higher concessional contributions cap of $35,000 per annum. For individuals under age 60, this is the fi rst increase above $25,000 since the previous government dropped the threshold from $50,000 in As the non-concessional contributions cap is six times the standard concessional contributions cap, the non-concessional contributions cap will increase to $180,000. Where the individual is eligible to use the bring-forward arrangements, the non-concessional contributions cap for is $540,000. If a client already triggered the bring-forward arrangements in or in , they are not eligible to use this higher non-concessional contributions cap until the relevant three-year period has elapsed. Concessional caps are particularly important for insurance and super advice. Often the client will be making additional concessional contributions to super to fund the premiums and those contributions, along with any superannuation guarantee (employer) or eligible deductible contributions (ie, self-employed or self-supported) must be below the thresholds. An increase may allow planners to restructure more cover inside super, moving premiums that are not usually deductible to an individual to a more tax advantageous environment. Conclusion There are a number of issues insurers are currently working through to ensure superannuation trustees comply when taking out new policies from 1 July Without guidance from the Australian Prudential Regulation Authority or Treasury, it is likely some insurers may take differing views. Hence, planners need to be vigilant when assessing the changes to definitions and providing comparisons and advice to clients. Only a short period of time remains to put cover in force with current, more generous terms and conditions. Katherine Ashby is a Senior Product Technical Manager, Life Insurance, BT. Questions 1. The Stronger Super changes impact insurance policies owned inside superannuation. The changes from 1 July 2014 mean: a. restricted cover for new policies, while existing policies can remain in force but no changes can be made. b. restricted cover for new and existing policies. c. restricted cover for new policies, while existing policies remain in force and can be increased, decreased and altered. d. more generous definitions for new policies, and no change for existing policies. 2. Changes to TPD defi nitions inside superannuation will include: a. Own Occupation will no longer be available. b. Any Occupation will be restricted, while Own Occupation will no longer be available. c. Any Occupation will be restricted, while Own Occupation and super-linked TPD will no longer be available. d. Any Occupation and non-working TPD definitions will be restricted, Own Occupation TPD will no longer be available, and there will be no change to super-linked TPD. 3. The superannuation contribution caps for the fi nancial year are: a. Concessional = $25,000 before age 50 and $35,000 age 50 and over, Nonconcessional = $150,000. b. Concessional = $30,000 before age 60 and $35,000 age 60 and over, Nonconcessional = $150,000. c. Concessional = $30,000 before age 50 and $35,000 age 50 and over, Nonconcessional = $180,000. d. Concessional = $30,000, Non-concessional = $180, Super-linked TPD: a. provides Own Occupation TPD inside super, although one-quarter of the premium must be paid from non-superannuation monies. b. provides Any Occupation TPD inside super, with a linked Own Occupation policy outside super; the premium is split 50/50 between super and non-super. c. provides Any Occupation TPD inside super, with a linked Own Occupation policy outside super, and in the event of meeting both definitions, both policies are payable. d. provides Any Occupation TPD inside super, with a linked Own Occupation policy outside super; the premium is split 67/33 between super and non-super. FINANCIAL PLANNING APRIL

5 TO ANSWER QUESTIONS Income protection unravelled SARINA RAFFO Suncorp Life THIS ARTICLE IS WORTH 0.50 POINTS CRITICAL THINKING Includes Indemnity value vs agreed value Income protection in an SMSF Income protection inside or outside superannuation Australia has four cities Sydney, Darwin, Melbourne and Perth in the top 20 most expensive cities in the world. The average percentage of after-tax income spent on servicing debt in Australia is 45 per cent. One in three people will be disabled for at least three months before age 65. Loss of income due to disability would have a devastating effect on clients lifestyles and that of their families. This makes a compelling case for income protection (IP). IP insurance covers you if you re sick or injured and allows you to receive what many of us couldn t survive without a regular wage. In this article I ll look at IP inside and outside superannuation, the technical aspects of IP and the tips and traps to be aware of. Tax deductibility The premiums for income protection are generally tax deductible both inside and outside super. However, the benefi t of a tax deduction is limited to 15 per cent in super but can be as high as 45 per cent if held personally. While there is no tax advantage inside super for many individuals, premiums under superannuation group policies can be cheaper because of access to wholesale rates. The ATO has indicated (Super Technical Minutes September 2011) that the tax deductibility of IP premiums in super is dependent on the alignment of the policy terms with a superannuation condition of release. Therefore, if the IP policy provides for benefi ts which cannot be released under SIS, then the trustee will need to engage an actuary or seek a private ruling from the tax offi ce to certify the portion of the premium which is allowed as a tax deduction. For ordinary (outside super) IP policies, the premium is generally fully deductible to the individual as an expense incurred in deriving assessable income. From 1 July 2014, new IP insurance in super will only be available if the policy defi nition aligns with the disability conditions of release. Access When a member satisfi es the insurer s defi nition of partial disability, the insurance proceeds (from a super fund-owned IP insurance policy) are released to the owner, ie, the super fund trustee. This is not a taxing point, so the trustee is not liable for any tax on the proceeds. Where the member satisfi es a superannuation condition of release, such as temporary incapacity, the benefi ts can be released to the member (subject to the trust deed). If a superannuation condition of release is not satisfi ed, the benefi ts are retained in the fund. The superannuation temporary incapacity condition of release means a member has temporarily ceased work due to physical or mental ill health that does not constitute permanent incapacity. It is not necessary for the individual to cease working altogether. Benefi ts may continue to be paid where an individual returns to work on a part-time basis while incapacitated, provided that the member s salary plus the temporary incapacity benefi ts are not in excess of the member s predisability earnings. Pre-disability income is not defined in superannuation legislation. Predisability income may be the income a client received over the past week, month or year. The industry generally calculates pre-disability income over 12 months immediately prior to temporary incapacity (or alternatively, as the best 12 months over a longer period of time). For policies held within super, the conditions of release allow payment of 100 per cent of pre-disability income. The pre-disability earnings amount used for calculating partial benefi ts is the income amount being received in the lead-up to the disability occurring. Ill health must lead to cessation of employment, so if the member is unemployed or on unpaid sick leave at claim, benefi ts may not be released. In practice, the benefi t period for IP in super is generally limited to two years. Indemnity value vs agreed value Under an indemnity policy, the individual is insured for what they re earning at claim time. If income has reduced since the individual applied for cover, the claim will be paid on the reduced amount. Agreed contracts differ from indemnity in that a person agrees, or locks in, their monthly benefi t at the time of application. An agreed contract ensures that at claim time the insured s benefi t is based on income earned prior to application (instead of predisability income, which was being earned in the lead-up to claim) and is paid regardless of changes in income. Agreed value (usually a more expensive option) is useful for self-employed people with fluctuating incomes. For those who have a reliable, regular income, a cheaper indemnity policy may be more appropriate. Under superannuation law, the amount released from super cannot be greater than the amount of income the individual was receiving before becoming incapacitated, ie, their predisability earnings. The legislative definition of temporary incapacity is generally more closely 32 FINANCIAL PLANNING APRIL 2014 www. financialplanningmagazine.com.au

6 CPD MONTHLY aligned with the indemnity policy wording for most income protection insurance policies. This is mainly why many providers offer indemnity only IP in superannuation. If agreed value is taken out inside super, there is a risk that the amount payable may exceed the allowable benefi t payment under temporary incapacity. For example, in some situations, the agreed value contract of the policy may result in entitlements greater than pre-disability income. In this case, the benefi t payable by the insurer on an agreed value policy which is over and above the benefi t that would be payable under the temporary incapacity (and indemnity definition) may be retained in the fund until a further condition of release is met by the member. Form of benefit payment There are a number of conditions (SIS Reg Schedule 1) that must be satisfi ed for a temporary incapacity benefi t to be paid: The payment must be paid as a noncommutable income stream. The purpose of the payment is to continue (in whole or part) the gain or reward which the member was receiving before the temporary incapacity. The payment period must not exceed the period of incapacity from employment of the kind engaged in immediately before the temporary incapacity. Temporary incapacity benefi ts can be paid from non-mandated employer contributions, such as salary sacrifi ce, but not from member or mandated employer contributions (eg, Super Guarantee or Award). Consequently, temporary incapacity benefi ts are usually paid under an insurance policy. IP Features Income protection through superannuation generally only provides basic cover, which may not be suitable for individuals who have more complex needs. In-built features and additional options are limited. To avoid confl ict with the sole purpose test, policies designed for superannuation ownership are stripped down. Features such as cancer cover, agreed value, specifi c injury, one-day partial and return to work are generally not available with IP in super. IP benefits paid from super are not treated as superannuation benefits. Payments from an IP policy are fully assessable to the individual and taxed at their marginal tax rate, regardless of whether it is held inside or outside super and whether or not a tax deduction was claimed for the premiums. This is because the payments replace normal salary and wages and are therefore assessable income. Since IP benefi ts in super replace the income the member was receiving before incapacity, certain features, such as crisis benefi t and needlestick injury benefi t, cannot be offered in super. The tax-deductible portion of the IP premium may need to be apportioned for features that do not provide either lump sums upon death, TPD or income payments while temporarily incapacitated. IP in an SMSF The sole purpose test provides that a regulated superannuation fund must be maintained solely for at least one of the legislated core purposes (broadly retirement or retirement-related circumstances) or for at least one of those core purposes and for one or more of the prescribed ancillary purposes (temporary incapacity). Broadly, benefi ts are limited to payment upon retirement, or retirement-related circumstances. This means a super fund cannot comply with the sole purpose test if its only asset is an income protection policy. Offsets Offset clauses allow insurers to reduce IP payments if the individual has other sources of income (for example, Worker s Compensation, other insurance policies, Centrelink benefi ts or related compensation). Many IP policies don t offset sick leave benefi ts, therefore, part of the insurance proceeds may need to be retained in the fund, so as not to breach the 100 per cent pre-disability income restriction. Taxation IP benefi ts paid from super are not treated as superannuation benefi ts. Payments from an IP policy are fully assessable to the individual and taxed at their marginal tax rate, regardless of whether it is held inside or outside super and whether or not a tax deduction was claimed for the premiums. This is because the payments replace normal salary and wages and are therefore assessable income. Individuals on a long-term IP claim may be offered a lump sum in settlement of future payments under the policy. In this case, the lump sum, Continued on p34 FINANCIAL PLANNING APRIL

7 TO ANSWER QUESTIONS Generally, it would appear that an individual in receipt of IP payments and who still holds an office is considered to be engaged in employment activity and therefore needs to meet the 10 per cent test in order to claim a tax deduction. However, the IP payments may not be attributable to employment and so the individual is likely to meet the 10 per cent test (provided they have not worked in the financial year). On that basis, an individual may be able to claim a tax deduction for personal super contributions (subject to meeting all other conditions for deductibility). being a replacement of income, is included in the client s assessable income. If payments under a super-owned IP policy are in the nature of compensation for loss or impairment of earning capacity, they are no longer payments in substitution for lost earnings and are therefore non-assessable income. For example, a lump sum benefi t option payable on total and permanent disablement (relating to an insured who is likely to never work again) is not to compensate the insured for loss of earnings but rather for the loss of their earning capacity. Therefore, the portion of the income protection premiums that relate to these types of benefi ts will not be tax deductible. Centrelink For Centrelink (and Department of Veterans Affairs) purposes, IP payments from super are treated more favourably under the income test than IP payments outside super. This may potentially mean greater access to social security income support during a period of disability. Periodic IP payments from a super fund are assessed as a defi ned benefi t income stream, ie, the gross amount is assessed with a nonassessable portion based on any tax-free component. Outside of super, periodic IP payments from the insurer may incur a harsher application of the income test, ie, a dollar-for-dollar deduction against any Centrelink benefi t entitlement. This occurs where the IP policy includes a Centrelink benefi t offset clause, therefore, it s Centrelink neutral whether IP is held in super or outside. Outside of super, a lump sum settlement may trigger a preclusion period (during which income support is suspended for a period of time). In contrast, a lump sum payment from a super fund is an exempt lump sum and the preclusion period does not apply. Contributing to super Individuals who are engaged in an employment activity in the fi nancial year in which they make a contribution need to meet a maximum earnings test (the 10 per cent test) if they wish to claim a tax deduction for personal contributions. A person will be engaged in an employment activity if they are engaged in an activity that results in them being treated as an employee for the purpose of the Super Guarantee Administration Act (SG). A person need not be physically engaged in the activity, for example, an employee will be engaged in an activity while they remain employed or hold an offi ce. This could apply where a person is in receipt of income protection (IP) and still holding an offi ce. IP benefi ts may be paid if an individual is unable to work due to illness or injury; they are not necessarily related to work. Therefore, IP payments may not be attributable to the individual s employment. Individual in receipt of income protection payments who still holds an offi ce Generally, it would appear that an individual in receipt of IP payments and who still holds an offi ce is considered to be engaged in employment activity and therefore needs to meet the 10 per cent test in order to claim a tax deduction. However, the IP payments may not be attributable to employment and so the individual is likely to meet the 10 per cent test (provided they have not worked in the fi nancial year). On that basis, an individual may be able to claim a tax deduction for personal super contributions (subject to meeting all other conditions for deductibility). Individual in receipt of income protection payments who no longer holds an offi ce If an individual in receipt of IP payments no longer holds an offi ce (ie, they have been deemed permanently disabled), the IP payments are not attributable to employment. Where there is no income from employment-related activities, it is not necessary to satisfy the 10 per cent rule. On that basis, an individual may be able to claim a tax deduction for personal super contributions (subject to meeting all other conditions for deductibility). IP inside or outside super? Cashfl ow and affordability issues, rather than tax, are often the key drivers to have IP insurance in super. Some general advantages and disadvantages of holding IP in super are listed below. These factors may vary depending on a client s own personal circumstances. 34 FINANCIAL PLANNING APRIL 2014 www. financialplanningmagazine.com.au

8 CPD MONTHLY Inside super advantages Cashfl ow impact is generally low. Premiums can be funded tax-effectively and cost-effectively using pre-tax dollars via salary sacrifi ce and personal tax-deductible contributions. IP policy is less likely to lapse due to cashfl ow issues, as premiums can be funded from super contributions and/or super account balance. Potentially cheaper premiums via group insurance rates. Automatic acceptance via employer default super funds, which means no medical underwriting. Inside super disadvantages Fewer IP features available and more sophisticated features (rehabilitation, one-day partial, needlestick, crisis benefi t) may not be available in super. Critical illness and rehabilitation benefi ts may need to be retained in super. IP benefi ts can only be paid for the period of incapacity. If premiums are funded from the super account balance, retirement savings may deplete. Many funds don t offer IP, except on an indemnity value basis. IP claim is subject to super fund s trust deed rules and insurer s IP defi nition. Claims process may take longer than outside super. Income protection inside super may be more appropriate for clients: with cashfl ow issues; experiencing affordability issues, such as on a tight budget; wanting a vanilla type product with minimal features; and with simple needs. Income protection outside super may be more appropriate for clients: with uncertain/irregular income (may want agreed value cover); with suffi cient cashfl ow (this might include professionals and tradespeople); close to peak of earning capacity; empty nesters (their priority may be increasing retirement savings); with taxable income greater than $300,000 (as there is contributions tax of 30 per cent of which only 15 per cent can be offset by the fund s tax deduction); and Income protection is a valuable form of insurance cover. The decision to hold IP insurance inside or outside superannuation should not centre on price alone; a wider range of issues, such as cashflow needs of the client, tax effectiveness, affordability, access and the features available, all require careful consideration. Ultimtaely, the decision will depend on the client s personal circumstances, including their objectives, financial situation and/or needs. who have maximised their concessional contribution cap. Conclusion Income protection is a valuable form of insurance cover. The decision to hold IP insurance inside or outside superannuation should not centre on price alone; a wider range of issues, such as cashfl ow needs of the client, tax effectiveness, affordability, access and the features available, all require careful consideration. Ultimately, the decision will depend on the client s personal circumstances, including their objectives, financial situation and/or needs. Sarina Raffo is Technical Strategy Analyst at Suncorp Life. Questions 1. Where a benefi t under an IP policy compensates the insured for loss or impairment of earning capacity, this portion is unlikely to attract a tax deduction. a. True. b. False. 2. Which of the following are advantages of IP insurance in super? a. Ability to choose agreed value cover. b. Premiums can be funded from personal or employer super contributions. c. Availability of sophisticated features. d. All of the above. 3. Which of the following statements is TRUE with regard to IP insurance? a. IP payments from super are taxed the same as normal superannuation benefits. b. The tax implications of purchasing IP insurance are generally similar within and outside super. c. Payments under a super-owned IP policy to compensate for loss or impairment of earning capacity are included in assessable income. d. Where a tax deduction was claimed for IP premiums, the IP payments are not included in assessable income. 4. IP outside super may be more suitable for clients: a. with tight cashflow. b. who want a vanilla product. c. who have affordability issues. d. with complex needs, requiring superior features. FINANCIAL PLANNING APRIL