Should I hold my TPD insurance within Superannuation?

the words pros in blue letters and cons in red letters on a balance over a question mark

In our article ‘Superannuation linked Life Insurance‘, we discussed which insurance products could be taken through a superannuation account. TPD Insurance is one product that is eligible to be held within superannuation. We  also revealed some of the limitations on such a practice, that are imposed through the Superannuation Industry Supervision (SIS) legislation.

Since that article was published, readers have raised questions as to the benefits (Pros) – and the pitfalls (Cons) – of holding TPD Insurance superannuation to secure protection themselves and their dependants from financial risks and obligations should they become permanently disabled.

The Pros and Cons of owning TPD insurance within superannuation accounts

The following Table shows the Pros and the Cons of holding Total and Permanent Disability (TPD) Insurance in this way. Note that a number of these features are common to those applicable to holding any ‘life’ (personal risk) insurance policy under a superannuation regime: they have been restated in the Table for purposes of completeness:-

Pros

Cons

If taking cover through a group superannuation account (employer, or industry fund usually), cover may be available on an ‘auto acceptance’ basis (not requiring any personal statement or medical reports) – and premiums will initially at least, be at what is known as ‘standard rates’ (i.e., there won’t be any loading for Smoker status/ health issues) applicable to the applicable industry/ occupation code. The benefits, terms and conditions of the policies issued under ‘auto acceptance’ terms may not be adequate to satisfy all of the needs of your particular, personal circumstances.In some cases (like ‘direct insurance’ taken online or by phone in response to media advertising), these policies may have some unexpected exclusions or limitations when a claim is made.
Insurance premiums will be paid from the superannuation account balance and not directly from your after-tax dollars (personal cashflow), making them much more affordable. Premiums paid for TPD Insurance out of the superannuation account are withdrawn from invested funds and erode the accumulating compounding of the contributions and the investment returns. Additional (tax-deductible/ concessional) superannuation contributions calculated to offset this effect can be beneficial, but may be impeded by the contribution caps imposed under legislation.
Insurance policies owned through grouped superannuation accounts (industry funds, employer groups and some ‘platforms’) may be available at a lower premium cost on the basis of the considerable amount of business able to be secured by the insurer through the particular source. Insurance policies held under employer group funds and/ or industry funds MAY expire after a term of non-receipt of contributions from the employer with whom the account was initiated. It is also the case in some such arrangements, that the premiums payable for the policy following leaving an employer group will be charged on a different, more costly basis.This increase can be significant, in some cases declaring you as a Smoker for premium calculation purposes. (This can be rectified in appropriate circumstances and you should seek advice on the matter.)
For trustees of a self-managed superannuation fund that has invested in direct real property (whether or not subject to borrowings external to the fund) there is an advantage to protect the assets of the fund for the contingency of the untimely total and permanent disability of one of the members – particularly of a member with a disproportionately high contribution to the ability of the fund to meet its commitments (because of higher contributions made by or on their behalf). Claims made against TPD Insurance within a super fund are, when eventually* paid out to the member, subject to taxation. The relevant tax payable is determined using a complex formula utilising days of service and days to (normal) retirement.
*Claims are made through the trustee to the insurer; and finally from the trustee to the member: this can cause (stressful) delays.
  Members wanting to insure through a superannuation account, for a TPD event are required to also hold a Life (Death) policy through the same account.
  There are two occupation definitions^ that apply to potential claims under a TPD policy: they are ‘any occupation’ and ‘own occupation’. Since 1 July 2014, any new TPD policy taken by the trustees of a superannuation fund can only be issued on the any occupation definition. The features of policy arrangements designed to provide the more complete cover of an own occupation policy are dealt with in this article.
^ Under the ‘Any Occupation’ definition, a claim will generally be paid if you’re unlikely to be able to work in any occupation that you are suited to by education, training or experience; whereas the ‘Own Occupation’ definition is satisfied when you’re unlikely to be able to work in your current occupation.
  The above point is of particular concern if you are insured through an employer group plan or an industry superannuation fund: under these arrangements, the trustees negotiate terms of the policies they offer – and they retain the right to vary those terms without notice to their members. There are a number of instances where members have been exposed to lesser protection because of actions taken by trustees to reduce premium costs: one that we became aware of in November 2014, was Australian Super, who adversely varied the generally applicable definition shown above, by changing ‘unlikely’ to ‘never’; and added the rider – ‘or any job they may become suited to.’

Trusted advice about insurance and superannuation –

Insurance and Superannuation are two elements common to the wealth management needs of most of us, particularly those having attained working age and beyond. As with many of the financial aspects of our lives, there is usually more than one answer to our questions about them. The one aspect that is relevant to all is that personal circumstances have a direct impact on what the best answer to your particular questions or concerns might be: and at Continuum Financial Planners Pty Ltd, we work to the mantra that – ‘we listen, we understand; and we have solutions’ to your personal and specific needs, that we deliver in personalised, professional wealth management advice.

To ensure that your best interests are provided for if you are holding TPD Insurance within Superannuation, contact our office (by phone to 07-34213456) or use our website to arrange a meeting with one of our experienced advisers.

Originally published in November 2014, this post has been occasionally refreshed/ updated, most recently in July 2021.