Insurance in Super Still Viable Option – Lawyer

Insurance in super will remain an attractive proposition for many, despite the tightening of the rules governing insurance inside superannuation, according to one legal expert.

Neal Dallas, principal with McInnes Wilson Lawyers, a founding firm of www.thelegalhub.com.au, said while the types of insurance policies available inside superannuation had become more restricted, there were still strong arguments for holding cover in super. But he stressed it is important for fund members and their advisers to consider the impact of the changes in order to make appropriate decisions about the placement of insurance.

From 1 July 2014, new legislation takes effect that limits the types of insured benefit that a regulated superannuation fund may offer. Regulation 4.07D of the Superannuation Industry (Supervision) Regulations 1994 (SISR) provides that a trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member of the fund unless the insured event is consistent with one of the following conditions of release:

1. Death
2. Terminal Medical Condition
3. Permanent Incapacity
4. Temporary Incapacity

According to Mr Dallas, the design of the changes ensures, or at least seeks to ensure, that superannuation funds are able to pay out insurance proceeds when they are received. It avoids incongruous outcomes where a fund might receive insurance proceeds (eg: for a trauma event) but not be in a position to pay out a benefit to the affected member because a condition of release is not met. In the past, the proceeds have remained locked up in the fund. Importantly, says Mr Dallas, the governing rules of the fund must also align with the conditions of release. This avoids a situation where the deed might otherwise prevent the pay out of the insurance proceeds.

…income protection held inside super makes sense

The main impacts of these changes is for ‘own occupation’ TPD and trauma cover, which can no longer be offered inside a superannuation environment. Changes also apply to the types of additional benefits and features that are available for income protection polices held inside super.

Mr Dallas says that given many advisers will now be considering whether to recommend ‘own occupation’ TPD and trauma cover held outside super as an add-on to any cover held inside super, it may also be worthwhile considering the appropriateness of maintaining any cover in super.

Mr Dallas provided the following arguments for and against holding cover in superannuation:

• Whilst insurance premiums in superannuation are effectively deductible because of the deductibility of the contributions made to support them, the amounts used to pay premiums otherwise reduce the contributions available to enhance the member’s superannuation balance.
• Contribution caps remain relatively low, which may be an issue if the premiums are relatively high.
• Death benefits in superannuation will be assessable when paid to non-tax dependants. Where there is a high probability of a payment of insurance proceeds to a non-tax dependant on death, cover outside super may be more appropriate. The deduction forgone will be far outweighed by the tax saved on the benefit.
• For those with a short future service period (i.e. older members), moving permanent incapacity cover (ie: TPD cover) outside superannuation may make sense. As with the death cover, the lost deduction may be outweighed by the taxed saved on the end benefit.
• Temporary incapacity cover (ie: income protection) held inside super makes sense. When under 60 the member enjoys a 15% tax offset. Once over 60 no tax is payable on the benefit. The premium is effectively deductible under either scenario.

The decision for clients and their advisers is to consider the impact of the recent changes, along with the tax effect both on premiums and insurance proceeds, having regard to the particular client circumstances.

To assist advisers in providing their clients with advice in this area, and more generally in estate and succession planning, a new offering has been launched to advisers nationally that provides access to quality law firms at wholesale fees. For more information or to register go to www.thelegalhub.com.au