From 1 July 2014 a new superannuation rule comes into effect which will prohibit a trustee of a regulated super fund from providing insurance cover to a member unless the insurance terms and conditions align with one of the superannuation conditions of release for Life, permanent incapacity (TPD) and temporary incapacity (income protection). The Government has confirmed that the insurance policy definitions do not need to adopt the condition of release definitions as specified in the SIS Regulations, but that they must be consistent with those definitions and that the insured benefits must be able to be released to members.
The new rules prohibit a trustee of a complying superannuation from providing certain types of insurance cover to a member on or after 1 July 2014. However, it is important to note that grandfathering rules will apply to exempt existing cover provided prior to this date.
The main changes are:
Total & Permanent Disability (TPD) insurance
For a trustee to be permitted to provide a member with cover under a TPD policy on or after 1 July 2014, the terms and conditions of the policy must align with the permanent incapacity condition of release. The policy must only pay a benefit where a member is unlikely, because of ill-health, to engage in gainful employment for which the member is reasonably qualified by education, training or experience. TPD insurance within super must therefore have an ‘any’ occupation definition. As a result, a trustee can no longer obtain an ‘own occupation’ TPD policy on or after 1 July 2014, as a benefit may become payable despite the fact that the member may still be able to engage in some other employment for which they were qualified by education, training or experience.
Under the new rules, a trustee will be prohibited from providing cover to a member under an income protection policy where the policy provides any ancillary lump sum benefits, such as redundancy, crisis, rehabilitation, specific injury or home care benefits (therefore only really basic IP contracts available).
One particular point to be aware of is under the new rules, a trustee would be prohibited from providing cover under an income protection policy that would provide benefits to a member who was unemployed at the time of suffering the invalidity. This means that an individual who is between jobs due to unemployment, retrenchment or redundancy, or is between contracts (i.e. Someone in the mining industry) is not entitled to receive any IP benefit for cover held in super. This is a significant issue with holding IP within super.
The new rules prohibit trustees from acquiring trauma insurance within super as the terms and conditions of these policies do not align with any of the specified conditions of release.
IMPLICATIONS FOR SMSF TRUSTEES
Trustees of SMSFs need to be aware of the new requirements when acquiring insurance policies and ensure that the policies they do acquire align with the relevant condition of release.
As of 7 August 2012, trustees of an SMSF must have a strategy to address insurance for member(s) of the fund. This doesn’t make insurance mandatory but it forces trustees to actively review the insurance requirements for the fund members on a regular basis. Trustees need to determine whether it is appropriate for members to have: all their insurance within super; all insurance outside super; some insurance inside, some outside; or no insurance at all.
If you require assistance in determining the appropriate types of cover required, the levels of cover and the ownership structure of your policies, contact our Risk Advisor.