Insurance is an important part of any good financial planning strategy. It is designed to protect your family’s life style and financial goals. Insurance can be divided into several different types :

Term Life insurance

This is the most common insurance and is relatively cheap. It pays out when the insured person dies. Term life insurance premium is deductible for superfund. When the member dies, the insurance provider pays the superfund because the superfund is the owner of the insurance policy. The trustees of the superfund can then payout the amount to the member’s estate or dependant. The member just have to make sure they have a binding death nomination agreement (BDN) so that their wishes are carried out by the superfund’s trustee. Binding death nomination agreements are covered in another article. (UPDATE : A death agreement is another agreement that is more permanent and don't require an update every three years unlike BDNs)

Total and Permanent Disability Insurance (TPD insurance)

This is commonly a rider policy on top of life insurance. When purchased through a superfund, it must be attached to a term life policy.  Again, it is relatively cheap. It pays out when the insured person suffer a total and permanent disability. This can be mental or physical disability. The insurance provider can take up to 24 months before they payout. The delay is usually due to doctors needing to confirm that the disability is permanent. There is a minimum 6 months qualifying period because there is a chance the insured could recover fully from the injury or disability.

TPD insurance can have the “own occupation” clause or “any occupation”. With “own occupation”, the insured is unable to return to their original occupation which they are trained for. With “any occupation”, the insured cannot return to work in any occupation. TPD insurance is deductible for superfunds. When the member suffers a disability, the insurance provider pays out to the superfund.

Whether or not the superfund can pay the insurance monies to the member will depend on the TPD policy, whether it is an “own occupation” or “any occupation” clause. If it is “own occupation”, the trustee of the superfund cannot pay the member because it doesn’t satisfy the Superannuation Industry Supervision Act’s (SIS Act) definition of “permanent incapacity”. In this situation, the TPD pay out remains trapped in the superfund until the member satisfy another condition of release.  If it is “any occupation” option, then the trustee can release the payment to the member.

Once the payment from the trustees is made to the member, it is taxed according to the SIS Act :

Trauma Insurance

This is the most expensive insurance cover. Trauma cover is usually a rider policy for TPD. It pays out when the member is diagnosed with cancer, heart disease, kidney disease, lung disease, organ transplant, paralysis etc. The PDS of the insurance provider has a list of 30 to 40 plus conditions. Trauma cover is expensive because the probability of these illnesses happening is high. Trauma insurance is not deductible for superfunds. The reason is that trauma cover does not have any connection with employment. The payout is based on doctor’s diagnosis of member’s critical illness and not on member’s inability to work.

Trauma insurance benefits after 1 July 2014

SMSFs are allowed to continue to provide trauma insurance benefits to members who joined a fund before 1 July 2014 and were covered in respect of that insured benefit before 1 July 2014, and such members can vary the level of that cover. For example, their cover could be increased or decreased, and any associated premiums adjusted, after 1 July 2014.

An SMSF trustee that continues to provide a trauma insurance benefit to such a member can purchase an insurance policy to support the provision of that benefit and still satisfy the sole purpose test in section 62 of the SISA, provided the following conditions are met (these are the conditions set out in SMSFD 2010/1):

• any benefits payable under the policy are required to be paid to a trustee of the SMSF
• those benefits will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release; and
• the policy was not acquired to secure some other benefit for another person, such as a member or member's relative.

SMSFs may not, however, provide a member with a type of cover they did not have before 1 July 2014 unless the insured event is consistent with one of the conditions of release specified earlier.

Income Protection Insurance

Income protection pays out when the insured is unable to work because of injury or illness. Income protection insurance pays 75% of the insured’s gross monthly income if it’s an indemnity policy. Or 75% of an agreed value if it is an agreed value policy. When taken up in a superfund, they are called salary continuance or income replacement policy. There is a choice of waiting period, 30 days, 60 days, 90 days, 180 days and up to 720 days. The shorter the waiting period, the more expensive the insurance premiums are. The benefit period can range from one year to age 65 years old. The longer the benefit period, the more expensive the premiums become.

Income protection insurance premiums are deductible in a superfund. A superfund may be the policy owner and receives the benefit payment, but whether or not it can forward the payment to the member will depend on the member meeting the requirements of salary continuance under the SIS Act. The insurance proceeds paid to the member are taxable income in the member’s tax return. The tax rates are :