Affordable life insurance with flexi-linking
For clients who want to ease their cash flow, but also have comprehensive life insurance cover, they could consider flexible linking or super-linking their insurance cover, writes BT’s Crissy De Manuele.
To ease the cost of life insurance, some clients hold their policy within super, so they can pay for the premiums with pre-tax dollars or with accumulated super. However, there are restrictions on the type of cover that can be held within super. Also, when life insurance is held within super, some product features cannot be taken out.
For clients who want to ease their cash flow, but also have comprehensive life insurance cover, they could consider flexible linking or super-linking their insurance cover. Flexi-linking or super-linking allows policies to be split across the superannuation and non-superannuation environments.
Price transparency and choice
When insurance is held in a flexi-linked or super-linked policy, clients may prefer to have different premium frequencies. This can make it easier for clients to manage their cash flow as well as reduce the administration where premiums are paid into super with rollovers. For example, they may wish to pay monthly premiums for the cost of insurance held outside super and pay annual premiums for the cost of insurance held inside super.
Some insurers’ quoting systems have the capability to show how the monthly or annual payments will be split between insurance that is held within super, and insurance held outside super. For advisers, being able to see the breakdown of the split payments on a computer screen, while assisting a client with their application for a policy, means greater convenience and simplicity. For clients, the information makes pricing transparent, and can also help them understand how flexi or super-linking works in practice.
Jane has a flexi-linked income protection (IP) policy with term life, total permanent disability (TPD) (any occupation) and trauma/living benefit. The term life cover and TPD (any occupation) are held within super, and linked to the trauma/living benefit that is held outside super.
There are two premiums payable. The cover held inside super costs $1,148 per annum while the cover held outside super costs $1,412 per annum.To make things easier, Jane chooses an annual premium frequency for the insurance inside super, as it will be funded via a rollover from another super fund. She chooses to pay monthly premiums for the cover held outside super, as this makes it easier for her to manage her cash flow.
Flexi-linking builds on the traditional concept of rider policies, but allows the rider to be held outside super. For example, a living/trauma policy could be owned outside super, but linked to a term life policy inside super. This is one of a number of ways flexible linked policies can be structured. The diagram below illustrates other possible arrangements that could be set up using flexi-linking.
Super-linking refers to a single policy spread across the super and non-super environment. This is relevant for TPD and IP policies. The portion of the policy that is held inside super is the part that would result in a claim that can be accessed under a super condition of release, while the portion held outside super is that which cannot.
Own occupation TPD policies cannot be purchased wholly through a superannuation fund. Clients seeking to utilise their super to fund insurance premiums can access own occupation TPD with super-linking. Own occupation TPD premiums are generally higher than an equivalent any occupation TPD policy, as clients are more likely to claim under an own occupation TPD policy. For this reason, the ability to fund premiums from super is very valuable.
The portion of the TPD policy that can be released from super (the any occupation portion) is owned inside super, and the own occupation portion is owned outside super (this is known as the ‘Super Plus TPD Benefit’).
The example below demonstrates how standalone TPD cover can be structured using super-linking. Note that, upon claim, the insured person will first be assessed against the any occupation TPD definition and any proceeds may be subject to tax on withdrawal. If they do not meet the any occupation TPD definition, only then will the insured be assessed against the own occupation TPD definition.
Alternatively, this can be structured so that term life cover is owned inside super, linked with an ‘any occupation’ TPD rider inside super and an ‘own occupation’ TPD rider outside super.
Further, if living/trauma cover is required, this can be linked to the term life policy inside super, as shown below.
All of the above arrangements provide a more generous TPD definition than what is available through super-only ownership, with as much of the premium as possible funded from super.
Super restrictions also limit the terms and conditions of IP policies when wholly owned through super. These restrictions do not allow benefits to be included on superannuation-owned policies, when the resulting claim could not be released from super. Clients who require a comprehensive IP policy, and also wish to use their super to fund the premiums, can once again use super-linking. The portion of the policy that holds benefits releasable from super is owned inside super, with the remainder held outside super, as shown below.
Also, IP benefits can only be released from super under a temporary incapacity condition of release if the client ceases work due to disability. If the client ceases work prior to becoming disabled they will not meet this condition of release and the benefit may not be able to be released from the super fund, unless an alternative condition of release is satisfied. If an IP benefit is paid from super under the temporary incapacity condition of release, the benefit paid cannot exceed the client’s pre-disability earnings amount.
If the client ceases work prior to becoming disabled, or their monthly benefit exceeds their pre-disability earnings, payments can be made through the non-super portion of cover, if super-linking is used.
When insurance cover is flexi-linked or super-linked it can allow a client to hold more comprehensive insurance cover while still paying for some of the cost of the insurance through super.
Crissy De Manuele, senior manager - product technical, life insurance, BT Financial Group
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