The 'insurance in super' of the future

Amongst the many actual and proposed changes to superannuation, one area that has not been as well publicised is changes to the permitted types of insurance in super. The Government changed the SIS regulations in March this year to limit the types of insurance that can be offered in superannuation. The intent is to avoid situations in the future where insured benefits could be trapped in super and the fund member does not have immediate access to them.   

From 1 July 2014, new policies can’t be written inside super, including SMSFs, unless the insured event is aligned with one of four defined conditions of release in super. These four conditions include:

•    Death
•    Terminal Medical Condition
•    Temporary incapacity, and
•    Permanent incapacity.

However, policies held by the fund trustee as at 30 June 2014 can be grandfathered indefinitely allowing you to implement strategies that include non-aligned benefits prior to that date. 

What does this all mean?

It means that certain types of insurance benefits that are currently structured inside super won’t be available in the future to trustees to take out on behalf of members. And it doesn’t matter whether that person was a member of the super fund prior to 1 July 2014. If they aren’t covered by these benefits prior to 1 July 2014 then you can’t write new policies in super after this date.

Two of the best examples of the types of benefits are ‘own occupation’ TPD and trauma cover. The insured event under these types of cover would typically not meet a superannuation condition of release. In the case of ‘own occupation’ TPD, because the claimant is assessed against their ability to perform their own occupation rather than against their ability to perform any occupation for which they have education, training or experience (or ETE), there is a risk that the fund trustee is unable to release the benefit.

Similarly with a trauma policy, there is no natural connection between the insured event under the policy terms and a condition of release in super.  While large super funds don’t offer trauma cover, a popular strategy has emerged where trauma cover is held by SMSF clients aged 55 and over, with the benefits accessed under the ‘permanent retirement’ condition of release.  In the future SMSFs will not be able to take out new policies offering these types of benefits since they are not aligned with one of the four conditions above. 

This will also have an impact on ‘plus’ style income protection benefits if they are held inside super.  Examples include payment of specific injury benefits even though the claimant has never ceased working.  Why – because under the temporary incapacity conditions of release the member must have ceased gainful employment as a result of the illness or injury.

Today, structuring cover in this way in super can be an appropriate strategy for certain clients, provided that the complications that arise from meeting conditions of release and any superannuation tax consequences have been considered.  But in the future, fund trustees will not be able to take out new policies for these types of benefits.

What benefits could be trapped?

Access problems can arise where the insurer’s policy terms are more generous than the super ‘condition of release’ – think of ‘own occupation’ TPD cover. This can have the effect of trapping benefits in super. The table below outlines the types of cover which are aligned with the four defined conditions of release.

What are the options?

Super fund trustees can continue to provide these types of benefits prior to 1 July 2014 so you can continue to recommend them to your clients prior to this date.
Beyond that, the obvious answer is that these benefits are held outside super. But this may be at the expense of cash flow limitations or tax deductibility of premiums. An alternative is structuring some cover inside super and linking it to other coverage outside super to take maximum advantage of the cash flow benefits and tax deductibility inside super.

The Maximiser benefit

AIA Australia’s Maximiser benefit is structured in such a way that it maximises the certainty of payment of a TPD claim while maximising opportunities for tax deductions.
Under the Maximiser benefit, cover is structured inside and outside of super. The ‘any occupation’ TPD benefit is held inside super meaning that the premium expense is deductible to the trustee. A linked ‘own occupation’ TPD benefit is held as a rider outside super. The portion of the premium for the ‘own occupation’ benefit is not deductible as it’s paid outside super.  If a benefit can not be paid under the ‘any occupation’ definition inside super, then it is assessed against the ‘own occupation’ definition outside super, providing greater certainty.

Introducing the Super Extras benefit

To take advantage of the legislative changes that will come into effect over the next year, AIA Australia has enhanced its Priority Protection product to include the Super Extras benefit.
This benefit allows you to structure the main Income Protection benefit inside super, confident that it will meet a condition of release. Additional benefits are held as a rider outside super. These additional benefits include a Specified Injury benefit, paid monthly for a defined period even if the client is still working, or a Rehabilitation Incentive benefit, paid even after the client has returned to full time employment provided they attended a rehabilitation program. 
This ensures that these benefits are not trapped, but they may have cash flow considerations since premiums for these benefits cannot be paid from super.   
 
To do list

• Take advantage of the window prior to 1 July 2014 to structure trauma or ‘own occupation’ TPD cover through your clients SMSF.
• Review the types of super owned benefits held by existing clients to make sure that they are structured correctly and can be paid out when expected. 
• Find out more about our Priority Protection Maximiser and Super Extras benefit.

To find out more about AIA Australia’s Priority Protection product, contact a member of our Client Development team on 1800 033 490 or visit aia.com.au/advisersite.

Tom Gordon

National Technical Sales Manager - Product

Copyright © 2013 AIA Australia Limited (ABN 79 004 837 861 AFSL 230043). All rights reserved. This information is intended for financial advisers only and is not for wider distribution. This information is current at the date of distribution and is subject to change. This is general information in summary only, without taking into account the objectives, financial situation, needs or personal circumstances of any individual, and may not be exhaustive. It is not intended as financial, legal, medical or other advice.