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Self Managed Super Fund (SMSF) Article
Disability Provisions Deserve Careful Scrutiny
By Tony Negline.
This article may be out of date.
17th March 2010
All super funds trustees must review their total and permanent disability insurance contracts to ensure they will get a tax deduction for their policies premiums.
Late last year the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, announced that legislative changes would be made to ensure current industry practise will apply until June 2011.
What is current industry practise? It is impossible to talk in generalities because there are very few common features with TPD insurances. In fact there are many different variations in the definition of TPD used by super fund trustees and life insurers.
For example, a life contract might provide that TPD will arise when the insured can no longer perform their current job. This type of definition is often referred to as "own occupation" TPD insurance.
Alternatively a TPD contract might say that the person will be permanently disabled if they cannot perform a job for which they are appropriately qualified by education, training or experience. This is often called a "similar occupation" definition.
Finally another variation in these life insurance contract terms says that a person will not be permanently disabled if they can perform any occupation. This is often referred to as the "any occupation" definition. These days this is not very common but is sometimes found in old super schemes for blue collar workers.
For some reason it has become quite common for life insurance companies to refer to the similar occupation definition as "any occupation". This is unfortunate because it has confused many people.
At present all super fund trustees will be claiming their TPD insurance premiums as a tax deduction regardless of the TPD definition found in their life insurance contracts.
Who determines if a person satisfies these disability definitions? This will depend upon the terms of the life insurance contract but typically life insurance company employees make the final decision after they have sought appropriate legal and medical advice from one or more qualified professionals.
Once a super fund trustee has successfully claimed on a TPD insurance contract they have to decide if the contract's proceeds can be paid to the super fund member.
A trustee will only be able to pay out these insurance proceeds to a member if the definition of totally and permanently disabled contain in their super fund's trust deed and the definition contained in the super laws are both satisfied.
The definition of TPD in a super fund trust deed should not be more lenient than that found in the super laws. The super laws allow a total and permanent disablement benefit to be paid if a super fund trustee believes that the member is unlikely to ever again perform an occupation similar to that which the person was doing just prior to their physical or mental ill health.
At this point in time many super fund trustees make a couple of mistakes. Firstly they might incorrectly assume that because the life insurance company has paid a TPD benefit then it is okay for them to pay out a benefit without making any assessment themselves as required by the super laws. Secondly if the life insurer has refused to pay out a TPD insurance policy then trustees might assume that they cannot pay a permanent disablement benefit without making any judgement themselves.
It's quite common for Self Managed Super Fund trustees to purchase "own occupation" TPD insurance in their super fund. In reality they are hoping that if they can claim on these types of insurance contracts they'll also be able to pay the benefit out of their super fund. Quite a risky strategy.
We next need to turn to how super fund TPD benefits are assessed for tax purposes. Various valuable tax concessions are available to a TPD benefit paid out of a super fund if two medical practitioners have declared that the super fund member is unlikely to work again in a similar occupation due to physical or mental ill health. It is possible to have life insurers, trustees and medical professionals all disagreeing with each other.
This brings us to what will apply from June 2011? From this date a super fund will only be allowed a tax deduction for their TPD life insurance contracts if the claim proceeds will be paid after two medical practitioners have declared that, due to physical or mental ill health. the life insured will be unable to ever again perform work similar to their pre-disablement employment.
Ultimately this will mean that super fund trustees will stop purchasing own occupation and any occupation TPD life policies.
All super fund trustees should examine their permanent disability contracts and if necessary consider purchasing a new life insurance policy.
Life insurers will often want to re-underwrite the super fund member for new policies. Any super fund trustee concerned about this new underwriting process might want to weigh up the costs and benefits of keeping their current TPD contract they have and possibly doing without the super fund tax deduction.
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