It's possible to fund your Total and Permanent Disability Insurance through a SMSF. Find why it may be beneficial for you.
Rather than purchasing retail life insurance, a growing number of people are choosing to fund their life insurance through their superannuation. Owning insurance through a SMSF has a number of benefits, the most important of which is the protection and peace of mind this type of cover offers to your family.
Want to compare cover for TPD through a self-managed superfund?
A self-managed super fund (SMSF) is a superannuation fund that is run by its own members. Unlike a normal retail or industry super fund, which is run by a trustee appointed by the fund, the members of an SMSF are the trustees of their own fund (can be up to four members). The main advantage of this is that they have much more control over how their superannuation is managed and their money invested.
The short answer to this question is yes. However, in order to receive a payout, your TPD policy's definition for disability must be able to satisfy the 'superannuation condition of release'.
What's considered the 'condition of release'?
Any of the following events:
- Terminal Illness
- Permanent or temporary incapacity
TPD policies that meet the 'condition of release'
- Most TPD policies with an “any occupation” definition of incapacity will qualify.
TPD policies that won't meet the 'condition of release
- If you have TPD insurance under an “own occupation” policy, you may not be able to meet such a condition of release, due to the incompatibility of the wording with the prescribed definitions.
|Type of TPD policy||Does it meet the conditions of release?||Can I get it inside super?|
What's the point of buying 'own occupation' if this is the case?
Because of this issue, superannuation legislation changed as of 2014, preventing TPD “own occupation” policies inside SMSFs. The only exception to this is if you already owned such a policy prior to the 2014 changes, in which case you may continue to hold it, but may have difficulty claiming on it if you become incapacitated.
For those who are unfamiliar with the terms “any occupation” and “own occupation”, the definitions are as follows:
- “Any occupation” TPD insurance. Covers you if you become disabled and a doctor believes that you will never be able to return to the workforce in any occupation suited to your education, experience or qualifications.
- “Own occupation” TPD insurance. Covers you if you become disabled and a doctor believes that you will never be able to return to your own occupation (i.e. the job you were working in when you became disabled).
Who can get own occupation?
“Own occupation” TPD insurance is restricted to certain occupation types, so it is only suited to those working in certain professions and it is more expensive and harder to purchase than “any occupation” coverage, as there is a much greater likelihood of a benefit being paid (outside of super).
So, should you get TPD insurance inside your SMSF? You would need to weigh up the pros and cons to make the right decision:
- You can pay for it from pre-tax contributions made through salary sacrifice or deductible contributions.
- Your SMSF receives a tax deduction on the premiums paid (providing the “any occupation” definition applies).
- Contributions that fund your premiums count towards your concessional contribution cap, meaning you may reach your threshold sooner.
- If you have an “own occupation” policy, you won’t satisfy a condition of release should you need to claim.
- If you’re not contributing enough to your super to cover the premium costs, it will start to eat into your retirement fund.
- Claim payment is slower inside super, as the fund receives it first before it can be released to you.
- You may be taxed on a payout, depending on your age.
Changes to tax rules for TPD inside an SMSF
Previously, SMSFs with TPD insurance for their members have been able to claim a full tax deduction on the premiums they have paid. But this situation changed in 2011 and again in 2014 and new provisions now apply.
You must meet the “super disability benefit”
SMSFs can now only claim a tax deduction on their premiums if their TPD policies adhere to the Tax Act’s definition of a superannuation disability benefit. This is a benefit which is paid to someone suffering from ill health who is unlikely to ever be able to be employed in a capacity for which they are reasonably qualified through education, experience or training.
As previously discussed, most “any occupation” policies use similar wording to the official definition, so most would attract a tax deduction of up to 100%, depending on their level of adherence (an actuarial certificate may be required to determine this).
Another way to meet the criteria for tax deductibility is if the policy contains a definition related to loss of independence in daily living. If someone can be shown to be unable to perform two or more defined activities considered part of daily living, then they will normally be considered to have met the disability benefit definition and a 100% tax deduction would be available to the SMSF (i.e. not being able to perform these activities means by definition they would not be able to work either).
Are TPD policies tax-deductible inside an SMSF?
So, to what extent do these changes affect the tax deductibility of TPD policies held inside SMSFs? Basically, if it is an “any occupation” policy and it conforms with the official daily activities and/or disability benefit definitions, then premiums are usually 100% tax-deductible. And if it is an “own occupation” policy and it conforms to these definitions, it is usually 67% tax-deductible or 80% if bundled with eligible life cover.
How much can be deducted by the SMSF?
|TPD (any occupation)||100%|
|TPD (any occupation), with any of these modifications:(a) activities of daily living|
(b) cognitive loss
(c) loss of limb
|TPD (own occupation)*||67%|
|TPD (own occupation)* with any of these modifications:(a) activities of daily living|
(b) cognitive loss
(c) loss of limb
|TPD (own-occupation)* combined with life insurance||80%|
|TPD (own-occupation)* combined with life insurancewith any of these modifications:|
(a) activities of daily living
(b) cognitive loss
(c) loss of limb
*Policy was bought before previous rules instated. Source: Australian Taxation Office (ATO).
Once you’ve made a successful claim, the benefit payment is sent to the SMSF trustee. But that payment can only be passed on to you or your beneficiaries once a condition of release has been met. These conditions include temporary disability, permanent disability or death.
It’s up to the SMSF trustee to determine whether a condition of release has been met, and then the benefit can be paid either as a lump sum or as an income stream. In terms of taxation, an income stream can be quite an effective option.