New rules means it’s time to check your insurance

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SMSF technical expert and columnist for The Australian newspaper
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If you plan to continue claiming a tax deduction on your super fund’s permanent disability insurance, then you better review the wording of your policy now because a change in the tax rules means many insurance policy holders no longer qualify.

From July 1, the ATO has fully implemented changes to the accepted definition of Total and Permanent Disablement (TPD), and insurance contracts that don’t meet the new standard can’t claim a full deduction. So, if you’re in the market for a new TPD insurance policy, you’ll want to choose one that’s specifically worded so that they’ll be fully deductible.

There have been many different definitions of Total and Permanent Disablement over the years, so it’s impossible to generalise about the countless types of TPD insurance contracts used by self-managed super fund investors. However, let’s take a look at three common definitions of TPD.

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Many super fund trustees have taken out a TPD policy that defines TPD as arising when the insured is disabled to the point that they can no longer perform their current job. This type of policy is often referred to as ‘own occupation’ disability insurance.

Another type of TPD insurance, known as ‘similar occupation’, defines TPD as arising when the insured is disabled to the point that they are unable to perform work for which they are suitably qualified by education, training or experience. This is similar to the definition of disability found in the super laws.

Yet another type of TPD insurance is the ‘any occupation’ definition, which says that a person isn’t considered permanently disabled if they can perform any type of occupation. This wording is uncommon in the Australian life insurance market.

Up until the end of June this year, you could claim a tax deduction on your TPD insurances policy regardless of the TPD definition found in your life insurance contract and in your self managed super funds trust deed.

However, from July 1, 2011 a TPD tax deduction will only be available for SMSFs if:

  • The insurance satisfies a super fund’s liability to provide a ‘disability superannuation benefit’, which is a benefit paid because of mental or physical ill-health. Two qualified medical practitioners must declare that the person is unlikely to ever be gainfully employed in a capacity for which the person is reasonably qualified because of education, training or experience.
  • The insurance covers all or part of a fund’s liability, as defined in the trust deed, as long as the trust deed doesn’t provide a disability benefit less lenient than that required by the super laws.
  • An arm’s length premium is paid for that part of a current or contingent fund liability covered by an insurance policy that also insures against events not dealt with under a fund’s trust deed. The Government has proposed that in these cases a defined percentage of the premium would be tax deductible. For example, 60% of premiums for ‘own occupation’ insurance would be tax deductible. The life insurance industry is hoping to have these percentages increased.

In practical terms, the following TPD premiums should be fully tax deductible from July 2011 if:

  • The insurance policy will pay a benefit only if the insured can’t work in any occupation.
  • The policy includes a ‘loss of independence’ type clause.
  • The policy includes home or domestic duties-type disability clauses, which are designed to provide insurances to people whose work principally involves running the family home.

Be careful: Insurance that covers ‘own occupation’ or loss of limbs and/or sight insurances can’t be paid out of an SMSF because, while an insurance policy may be payable, the super law definition of TPD has not been satisfied. This means the insurance proceeds may be trapped in the super fund.

If you have a TPD contract that was purchased before July 2011, you should consider purchasing a new life insurance policy. A Life Office may want to re-underwrite the life insured (that is, the super fund member) for new policies. If you’re concerned about this new underwriting process, you should consider weighing up the costs and benefits of keeping your current TPD contract and possibly going without the super fund tax deduction for the 2012 financial year and beyond.

 

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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