Your super fund may already be covering you by default
'Own Occupation' TPD Insurance is not available through Superannuation.
There are different tax implications for TPD cover inside and outside of super
Total and permanent disablement (TPD) insurance provides a lump sum benefit payment in the event of total and permanent disability, as defined by an inability to work either your “own occupation”, or “any occupation” depending on the policy.
Is TPD worth getting inside a superfund?
There are benefits and drawbacks.
Life cover, income protection and TPD insurance are often held inside super because it is cost-effective to do so and they are often set up by default with an employer’s nominated superfund. It's usually cheaper this way. There are also additional tax benefits that come along with a super TPD policy.
On the flip side, getting a claim proven could be harder than a TPD policy outside of super because you'll need to be considered disabled in an 'any occupation' definition.
Your TPD premiums can be paid from the amount available in your super, from either accumulated super balances or employer’s contributions. You can also make additional contributions by the way of salary sacrificing through your employer.
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Case study 1: Cover usually decreases as you get older
Policies that are included with your super are by default “unit-based” cover. What this means is that you are given “units” of cover based on your age. As you get older, the amount of cover you have decreases.
We spoke to Julia, a former ambulance officer (57, Queensland) who made a claim in 2016 for fibromyalgia, a condition resulting in widespread muscle pain and tenderness. This claim came after suffering PTSD in the two years prior. She made the claim under the assumption that she would receive $450,000.
After undergoing an 18-month claims process with her superannuation fund, she was notified that she would receive $300,000 in disability cover. This was $100,000 less than the amount Julia believed she would be entitled to when she “ticked the box” for insurance with her super.
“They told me I could only receive $240,000 because of my age, which is almost half of what was promised… then they said they would backdate the payment to 2015 so I would receive 300,000.”
After speaking to a representative from the superfund, we can confirm that the policy does reduce cover as you get older, but will backdate the amount covered to the date of the claim.
“Make sure you check if your cover diminishes as you get older. Age reduces cover and it’s something I wish I had known sooner.”
What’s the key takeaway
Find out if you have unit-based cover. That way you won’t be surprised if you find that your cover decreases with your age. You may also be able to change your cover to a “fixed” arrangement that doesn’t decrease with age.
Make sure you review your life insurance regularly. If Julia was aware of the way her cover would diminish over time, she could have adjusted the amount she was covered for before it was too late.
It’s not all bad. You will be backdated to the moment where you are actually diagnosed. If you’re unsure, check with your superfund.
A tip from Julia
When making a claim: “Be aware of the independent medical assessments, especially those provided by the insurance company. Demand taking in a support person who can witness and verify what he or she said.”
Case study 2: How offsetting can impact your TPD cover
It's really important that when getting TPD inside super, you watch out for any disclaimers that could offset or reduce your claim. Two former Qantas pilots recently lost close to $1 million each as a result of this after illness forced them to stop working.
Both Anthony Byrnes and Campbell Gribble are from Sydney and were members of Qantas Super. Their policies included total and permanent disability insurance as well as a separate income protection insurance policy that would cover them up to their 60th birthday.
Rather than provide them with greater financial security, the two insurance policies they each held were the reason they suffered such a huge financial loss.
That's because your income protection benefits can be reduced if you receive other benefits or income during the same time that your insured benefits are paid.
The two pilots say they were unaware that their claim to total and permanent disability would be offset by any income protection amount. As a result, when they applied for the lump sum benefit, it had gone from around $1 million to nothing.
While TPD and income protection insurance offer slightly different benefits (TPD provides a lump sum benefit payment in the event of total and permanent disability and income protection gives you a portion of your wage if you are sick or have an accident and can't work) having more than one policy can, in certain circumstances, lead to offsetting.
It's important then that when taking out an income protection policy, you make sure it will not offset or reduce your superannuation TPD cover. Speaking to an advisor is an effective way of avoiding certain clauses that might render your TPD cover worthless.
Am I eligible?
To be eligible for total and permanent disability cover through super, you will need to satisfy the following conditions:
You are a member of complying super fund;
Have an accumulating super benefit;
Regular contributions are made by your employer; and/or
Are eligible to contribute to super; you have to be either under the age 65 or 65-75 and able to meet the work test.
Is TPD included in my super?
Life cover, income protection and TPD insurance are often held inside super because it is cost-effective to do so and they are usually set up by default depending on your employer’s nominated superfund.
Your TPD premiums can be paid from the amount available in your super, from either accumulated super balances or employer’s contributions. You can also make additional contributions by the way of salary sacrificing through your employer. These personal contributions may also be tax deductible, provided that you are eligible under the regulations laid out by the Australian Taxation Office (ATO).
What types of TPD can I get inside super?
As of 2014:
You cannot take out an “own occupation” TPD policy through superannuation.
You can only get “any occupation” TPD insurance.
Any Occupation vs Own Occupation
Any occupation: This type of policy will only pay out if you are permanently disabled, as defined by an inability to work “any occupation” to which you are suited by education, training or experience.
Own occupation: This cover will pay out if you are unable to work your “own occupation” anymore.
Why is this the case?
There are a wider range of situations where an “own occupation” policy will pay out. This conflicts with the purpose of TPD that's provided through super, which aims to pay out when someone is 'permanently incapacitated' (which is more close to an 'any occupation' definition).
When will a super TPD policy payout?
You will need to meet the 'permanently incapacitation' definition. This is how superfund's define a disability.
Definition of disability for superannuation funds
A disability super benefit definition is met when you have satisfied the following conditions:
(1) You suffer from ill-health, either physical or mental;
(2) You are unable to be gainfully employed ever again in a capacity in which you are reasonably suited to by education, training or experience;
(3) You have been certified by two (2) medical practitioners to have both conditions of (1) and (2).
Loss of a limb
For example, a cosmetic surgeon who loses a hand might no longer be able to work their “own occupation”, but might still work in a related field as a teacher, albeit at significantly reduced income.
Will a super TPD pay in this case?
With an inside-super “any occupation” TPD policy they would not be able to access this cover, and might not be able to receive any TPD benefits.
Consider 'own occupation' outside of super for wider protection
As such, the importance of “own occupation” TPD insurance, and therefore the suitability of TPD insurance through superannuation, is largely dependent on your occupation, skills and income.
Occupation: If your occupation requires special physical skills such as manual dexterity for a surgeon, it may be more worth looking into cover outside of super.
Skills: Any occupation cover pays out when you are unable to perform a job that you are suited to by education, training or experience. If you have the skills to perform a different job, even if it pays a lot less, you may not qualify for a claim.
Income: If you or your family is dependent on consistently high income it may be more worth looking into “own occupation” cover outside of super, as the payout may help serve as an additional buffer in the event of reduced earnings.
How is TPD insurance taxed inside super?
Generally, when your premiums are tax deductible then benefits paid will also be taxable. When your premiums are not tax deductible, benefits won't be taxed either.
When held outside of super, your TPD insurance premiums are usually not tax deductible.
When held inside super, premiums paid on any occupation TPD policies with your pre-tax earnings are tax deductible up to maximum allowed by the superannuation concessional contributions cap1. Your super fund can essentially claim a tax-deduction, which is passed onto you.
What are superannuation contribution caps?
Tax-deductions are available when you pay for premiums with your pre-tax income e.g. salary sacrifice from your employer. There is however, a cap on how much of these types of payments you can make towards your super (this includes any contributions that aren't going towards your life insurance premium, but just your superfund).
Super contribution cap changes
Superannuation contribution caps after 1 July 2017
The limit for the 2017-2018 financial year will be $25,000 for everyone. Any contributions over this amount will be taxed at the marginal rate, plus an additional “excess concessional contributions” charge.
What this means is that if your superannuation insurance premiums push your total superannuation contributions for the year above $25,000, you’ll probably be paying tax that you wouldn’t be paying if you had insurance outside of superannuation.
Superannuation contribution caps before 1 July 2017
Until 30 June 2017, for the 2016-2017 financial year, the cap depends on your age.
Under 49: $30,000
49 or older: $35,000
Any contributions over this amount will be taxed at the marginal rate, plus an “excess concessional contributions” charge.
Generally, $100,000 is the initial limit of tax-free superannuation TPD insurance payouts as of 1 July 2017.
What about “own occupation” TPD super policies purchased prior to 2014?
These policies can continue unchanged, although are no longer sold in Australia. The tax deductibility of premiums generally ranges from 67% for standalone TPD policies, to 80% for TPD policies that are bundled with life cover.
Your benefit payment is split into two components:
Tax-free portion. There is a portion of your benefit which is not subject to tax.
For a TPD claim through superannuation, you will need to meet both the terms of your policy and superannuation conditions of release. In addition to your policy terms, your super fund must ascertain that:
You are suffering from ill-health, whether physical or mental
Two legally qualified medical practitioners have certified that, due to ill health, it is unlikely that you can ever again work in a job you are reasonably qualified for
When the conditions are met, the benefit amount from is paid from the insurer to the trustee of the super fund, who will then pass it on to you.
With TPD policies outside of superannuation, you simply need to meet the conditions of your insurance policy and liaise with the insurer to get benefits paid directly to you.
Should I get TPD insurance inside super, or outside?
The right option for you depends on your needs, both financially and in terms of cover. Generally, if you can find effective cover through superannuation, it might not be worth paying more for cover outside. Conversely, if you need some of the benefits that can only be found outside of superannuation e.g. Own Occupation cover, it may be well worth the extra cost.
A few conditions to understand:
The additional cost of the TPD insurance outside of super may be significantly offset by tax differences for some people.
The benefits of “own occupation” cover mean policies outside of super might be a far preferable option for some people.
Benefit taxability for TPD insurance held inside super can be unpredictable, and will depend on when the disability occurs, while TPD benefits paid outside of super will generally not be at all taxable, and will be more predictable.
An insurance broker or financial advisor may be able to help walk you through the factors specific to your situation, what it means for you and some of the things that need to be considered before you take out a policy.
DISCLAIMER: This article contains general advice and does not consider your own personal circumstances. It is not tax advice and the general nature of this material may not be applicable to you. You should obtain professional advice and verify our interpretation before relying on the information contained in our article.
Will Eve is the lead publisher of the global team at Finder. He was previously the group publisher for insurance for Finder Australia. Will has a Bachelor of Communications from the University of Technology Sydney. He loves the challenge of launching Finder into new markets while helping grow Finder’s global team.
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