Total and permanent disability [TPD] insurance is frequently something set up through super. Often, we find aspects of the agreement are overlooked and exactly what happens when a claim is made isn’t always understood. We’ve prepared a video and breakdown below to help you keep track of some important factors when setting up or reviewing your insurance.

tax element

When your TPD insurance is set up through your super fund and a claim is paid you can expect a taxed element on most occasions. This does depend on your age and this example focuses on those below the age of 60.

The amount of tax to be withheld is based on several factors, primarily;

  1. When your last day of work was from the injury or illness
  2. The eligible service date that you started the fund or that’s been calculated inside that fund
  3. Your future days to age 65

We sometimes find this tax is not known or remembered by clients until the event occurs, which obviously is not ideal and creates an unpleasant surprise.

So, what to do? Well, really you need to ask yourself… do I want my superfund to fund my insurance premiums, or do I want to fund them personally? And the conversation really comes down to knowing your cash flow. If you’d like to have a chat to find out what’s best for your situation, you can get in touch with our financial planning team here.

deductibility of premiums

The deductibility of premiums to the super fund is another aspect often overlooked. And that’s a benefit to the super fund and indeed your money, which is your super fund as well versus the tax proceeds that you could expect to pay if and when a claim is paid under TPD.

where to from here?

In the event of a claim, there are three options you can consider…

Most commonly, the money is withdrawn. You need the funds to fund debt reduction or accommodate the cost that you’re experiencing from the TPD claim.

Another option often available is to have the super fund offer you an income stream that could be paid overtime or for many years ahead. There can be a small trap with this option in that the insurance may want to reassess the claim each year that the monies are released compared to having the option to release it regardless, you’re being assessed once and that’s retained if that was the case.

Lastly, depending on your age and the requirements at the time, you may be able to leave it inside your super fund for years ahead, potentially into your retirement which may have a different tax outcome that would be beneficial to you.

All of this won’t be known to you until you go and claim when that day may occur.

what to keep in mind

The most important thing out of this is the trade off conversation, not to leave the conversation for claim time, but pre-assess it yourself and think; “well, what happens if I have a claim? How would I like to see my money paid to me? And what can I expect the tax element to be? Am I accepting that? Or do I need to gross up the sum insured to accommodate the tax that my fund might need to accommodate to the ATO?”

Of all of this, the most important thing with having insurance inside super is to do three simple things.

  1. Take an active interest in your super fund and your insurance. Know what they are and how they’re going to respond to you in your time of need.
  2. Retain control. With the correct super fund structure, you can retain better control than perhaps with other super fund structures. And that really comes down to whether it be self-managed, whether it be a retail fund, an industry fund, know how they react and what their trustee requirements are and what they’re going to offer you or not offer you in your time of need.
  3. Know your cash flow. If you understand your cash flow, it may be beneficial to not to fund your insurance or part of your insurance inside super and perhaps fund it personally. This leaves the cash you would be paying for insurance in your super fund to grow for your future retirement.

we’re here to help!

As always, if you have any concerns or would like to have a chat about any of your finances, you can get in contact with our financial planning team at oneplace@businessdepot.com.au or give us a buzz on 1300 BDEPOT.

businessDEPOT Financial Planning BNE and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. businessDEPOT Financial Planning SYD is an Authorised Representative of Count Financial Ltd ABN 19 001 974 625 AFSL No. 227232. The information contained within this blog and video does not consider your personal circumstances and is of a general nature only. You should not act on it without first obtaining professional financial advice specific to your circumstances.