Total and Permanent Disability Insurance Inside Superannuation

Over the past two and a half years, the life insurance industry has seen an increase in total and permanent disability insurance (TPD) being written within superannuation. Due to the elimination of reasonable benefit limits (RBLs) on 1 July 2007, more people have recognised the attractiveness of funding life insurance premiums through this vehicle.

Affordability is just one consideration when analysing the appropriateness of TPD insurance inside superannuation. In September 2009, the ATO issued new guidelines on what conditions must be satisfied for a member of a superannuation fund to meet a condition of release, and obtain the tax concessions, as a superannuation disability benefit (i.e. TPD benefit) (ATO ID 2009/108, ATO ID 2009/109, & ATO ID 2009/125). These guidelines provide some interesting insights.

Conditions of release for TPD Insurance inside superannuation

A disability superannuation benefit meets a condition of release when: two medical practitioners have certified, and the trustee is reasonably satisfied, that the member is unlikely, because of ill-health (whether physical or mental), to engage in gainful employment for which the member is reasonably qualified by education, training or experience. (s995-1 ITAA1997; SIS Regulations 6.01(2)).Two questions have been raised by this legislation:

1. If a member only withdraws part of the benefit, do they need to “requalify” if they wish to withdraw additional lump sum payments from superannuation?

2. After the first partial lump sum benefit is paid, if a member either recovers from their injury or illness, or is retrained so they can return to work, do they need to “requalify” for subsequent lump sum TPD benefits?

In both cases, it depends. The following example helps to explain how the legislation is applied in practice.

Example 1
A member does not need to requalify for the TPD benefit if the fund pays a series of lump sum benefits.

The provision made by the ATO was that the lump sum benefits were all paid in the same financial year, and there was no expectation that the member’s medical condition would improve in that time frame to such an extent that the original opinions from the medical practitioners would have changed. If there was a considerable time between lump sum payments (i.e. years rather than a couple of months) then it may be necessary to submit new medical certificates to receive additional TPD lump sum benefits.

For more information on Total and Permanent Disability Insurance Inside Superannuation please refer to www.xLife.com.au. 

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