In the event of terminal illness, clients with life cover inside a super fund may now have access to funds they were not previously eligible for.
Earlier this year, the Australian government passed the Tax and Superannuation Laws Amendment (Terminal Medical Conditions) Regulation 2015, extending the certification period for a terminal medical condition from 12 to 24 months.
This change, which commenced 1 July 2015, makes it easier for a person with a terminal illness to access their superannuation earlier. While this applies to the Superannuation Industry (Supervision) Act 1993 (SIS Act) framework, the explanatory statement confirms there is no requirement to change the insurance policy terms.
Relationship with insurance products
These changes relate to the release of superannuation benefits where a terminal medical condition exists. The regulation makes no change that requires insurance products be offered on a 24-month certification period. Regulations state that a trustee must not provide a benefit unless the insured event is consistent with certain conditions of release (including on the grounds of a terminal medical condition).
Implication of the change including group insurance policy definitions
While there are no changes to insurance policy terms, trustees will need to effectively communicate with members and safeguard the provision of insurance cover – particularly where a member does not meet the insurance policy terms for a benefit but does satisfy the new SIS Act condition of release. When considering this change, the clear benefit of extending the insurance policy certification period is that a member receives their benefit up to 12 months earlier than under the existing rules. By paying their benefit earlier, a member will have money released to support their quality of life during their remaining lifespan.
Practically, it is beneficial to pay a member their superannuation and insurance benefit at the same time. If this isn’t possible, the member account will need to remain open so the insurance cover can continue within the fund, until the member meets an insurance policy definition. As identified in the federal parliament’s explanatory statement, fund vigilance to keep the account open and funded would be required.
Another consideration for both the insurer and fund is the cost of insurance premiums. Extending the certification period will generally come at an increased premium cost. Under the 24 months rule, claims will be paid earlier. As insurance cover in superannuation funds generally reduces with age, a higher benefit will be paid. Ultimately, the impact will vary based on a fund’s insurance design, member demographics and claims history.
Other challenges and issues
Insurance policy definitions by fund may differ from the SIS Act definition. For example, some definitions use the words ‘will die’ rather than the SIS Act ‘likely to die’. This means the insurance definition may be stricter than the SIS Act definition. Simply updating the certification period doesn’t guarantee alignment, so in some cases a benefit may be paid under the SIS Act but not under the insurance policy definition. In this situation, the trustee will still need to ensure the member’s account remains open with a sufficient balance for insurance purposes.
Extending the certification period may also present some difficulties for doctors, who will be called upon to make survival predictions over a relatively longer period of time, including in cases with medically uncertain outcomes. Historically, the vast majority of terminal illness claims were for cancers. While some cancers have a high mortality rate where survival outcomes are relatively easier for doctors to estimate (such as pancreatic or liver cancers), predicting long-term survival outcomes for many other cancers can be more difficult.
For example, it can take months to determine whether or not a treatment plan has been successful and a cancer is in remission. Patients may also undergo several treatments before their condition is considered ‘terminal’. Constant advances in medical treatments and technologies can also prolong life, possibly significantly in certain cases.
So where to from here?
While they will differ, broadly speaking the options available to funds are:
- Continue with the existing insurance policy definition at 12 months' certification. The key consideration here is that the trustee must ensure a member’s account balance has enough funds to continue the payment of the insurance premiums.
- Change the insurance policy wording to align to 24 months' certification. The key consideration here is the potential increase to premiums and determining whether this is in the best interest of members.
In the event of terminal illness, clients with life insurance cover inside a superannuation fund may now have access to funds they were not previously eligible for at this time. It is therefore advisable for advisers with clients who are potentially impacted to check with the relevant funds to see whether or not they have upgraded their definition of terminal illness within their insurance offering.
Financial advisers should also be aware of the potential implications for a client with a terminal illness having access to accumulated superannuation funds, but not being eligible for a terminal illness claim under the fund's insurance. This can happen if medical certification is received for a period greater than 12 months, but less than 24 months. Under this scenario, the client would be eligible for their accumulated benefits under the early release provisions of the fund, but not for the insurance definition of terminal illness – meaning they might lose entitlements to the insurance cover with their superannuation fund if their account balance is released. Advisers with clients who could be affected by this scenario should check with the relevant superannuation funds to see how they plan to manage the potential for this outcome.
Source 1: Tax and Superannuation Laws Amendment (Terminal Medical Conditions) Regulation 2015 available: https://www.comlaw.gov.au/Details/F2015L00968/Explanatory%20Statement/Text
Robert Nunez is head of CommInsure's industry fund segment, life product and distribution
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