In 2014, more than 23 per cent of claims made on BT term life policies were paid due to terminal illness¹. There are advantages to receiving a terminal illness payment, rather than a death payment from a term life policy. While most of the proceeds will continue to be used to provide for the client’s family, an early payment allows some of the proceeds to be used by the client themselves.
While it is up to each individual how they spend their insurance payment, the money could be used for:
- Palliative care;
- Specialist medical treatments;
- Accommodation near to medical facilities;
- Transportation to and from medical facilities; or
- Replacement income for a family member who has now become a full-time carer.
In addition, funds could be used to fulfil the client’s life-long dreams, as well as creating lasting memories for their family. All of this comes at great expense and may be unattainable without the payment of insurance proceeds.
If cover is owned inside superannuation, there is a substantial difference in tax payable when proceeds are received as a terminal illness payment, rather than death payment. If a term life policy is owned inside super and the beneficiary is a non-tax dependant (for example, an adult child), up to 32 per cent tax will apply on a portion of the insurance proceeds if paid upon death. However, if proceeds are paid early because of terminal illness, tax will not apply and the full amount of proceeds are payable to the client.
Similarly, an individual, who has suffered a permanent disablement that has deteriorated to a point that they are terminally ill, can access their insurance from super tax-free. Total and permanent disability (TPD) proceeds are generally taxed as a super lump sum, where there may be tax payable on proceeds paid to someone under age 60. Taxable proceeds paid to individuals below their preservation age² are taxed at 22 per cent³. However, if TPD proceeds are paid under the Terminal Medical Condition release criteria from super, regardless of the client’s age, tax will not apply.
On 1 July 2015, the definition of the super condition of release, Terminal Medical Condition, changed so that if two doctors (one a specialist) certify that an individual suffered an illness or injury that is likely to result in death within 24 months, members can access their superannuation, and receive it tax-free. Any insurance proceeds that are paid into the super fund can be accessed in the same way.
Prior to 1 July 2015, terminally ill clients could only access their super if their illness or injury was likely to result in death in the next 12 months. The expansion of the Terminal Medical Condition definition allows terminally ill individuals to access their super earlier than before, posing the obvious question as to whether insurers will align policy terms, so that clients can also receive terminal illness insurance payments 24 months prior to expected death, as well as their accumulated super savings.
On 1 October 2015, BT led the industry by aligning terminal illness policy terms, to allow both existing and new clients to receive their insurance and super at the same time. This prevents terminally ill clients from undergoing the onerous medical examinations and recertification process 12 months later, which is what could be required with other policies. Further, having earlier access to term life proceeds may lead to a higher quality of life for an extended period (up to 24 months). Funding could be available for palliative care or life-extending medication, which traditionally may not be affordable for terminally ill clients until 12 months later, when life insurance proceeds were available.
Facing terminal illness is a traumatic event for the individual and their family. Life insurance provides financial benefits, but also the invaluable feelings of certainty and peace of mind at what is otherwise a devastating time. Bringing this certainty forward by 12 months will make an enormous difference for many clients, ensuring their cover is accessible when they need it most.
1 BT 2014 Life Insurance claims statistics
2 An individual’s preservation age depends on their date of birth. Individuals born prior to 1 July 1960 will have reached their preservation age of 55. Individuals born from 1 July 1960 will not have reached their preservation age and will be subject to 22% tax on the taxable component.
3 If the individual qualifies for the Disability Superannuation Benefit, a portion of the proceeds will be paid tax-free.
Rachel Leong is a product technical manager of life insurance at BT Financial Group
I received my permanent disability and death payment a couple of years ago, with all the supporting documents and letters. 1. Hospital however are trying to take me to court for fraud as the letter they gave me of diagnosis they say was not written by them…. and I know for fact it was, where else would I get it from. Anyway 2 or 3 years later my diagnosis has changed from a physical to a more mental eg. Dimentia or something similar nobody is really talking to me just yet… I do have alot of other physical pain arthritis and others. ..
Jason
Thanks Anthony. I agree that each case should be assessed on its own merits. However, it is important to remember that not all super funds offer the anti-detriment payment. Further, as you are unable to roll over a death benefit, you cannot roll to a fund that does offer the anti-detriment payment after the fact.
Tax considerations should also be balanced with timeliness of payments.
However, I do appreciate and acknowledge your comments made.
Thanks Sandy – appreciate the feedback.
Super can be released as either a lump sum or pension, if accessed under ‘terminal medical condition’. However, tax law restricts the ability to receive such a payment tax-free to lump sum payments only (FYI ref: ITAA 1997 Section 303.10).
Therefore, a terminal medical condition pension will be treated as a normal pension ie. the 15% pension rebate will only apply when the individual has attained their preservation age, or where they are disabled; and pension payments will be tax-free once the recipient reaches age 60. So yes, I agree with the previous advice you have received by other Technical teams, however it is not accurately described as a death benefit.
Great article Rachel.
Could you confirm what the tax treatment would be if a terminally ill member decided to draw their super benefit as a pension? My understanding is that since they are claiming a terminal illness, it would be payable free of tax. However when I called a number of “Technical Assistance” line, they all said that the pension would be treated like a regular super death benefit; in my client’s case, his wife and the member was under 60 therefore MTR less 15% tax offset would be payable. Are they right?
Its a good point Anthony – can you put your insurance in a different super fund so that you can claim on it, but then leave your super until death? Or, withdraw your insurance payout from super but leave your super monies until death? It will be interesting to see if the government proceeds with their proposal to remove anti-detriment payments
Nice article Rachel – thanks. To add to the INSIDE SUPER comment – Let’s not forget that every case will be different and needs to be assessed on the prevailing circumstances. In a death benefit claim from super I assisted last year, the lump sum tax borne by the non-dependent (for tax) adult beneficiaries (there was no spouse) far exceeded the anti-detriment payment. The late member could not have had as much insurance cover as she did had she not taken it in super. If only they’d sought advice before she passed.
INSIDE SUPER – BEWARE!! A few good points but important to also note for insurance paid through super under terminal illness benefit will forego any entitlement to an anti-detriment payment. This amount can add up to quite a substantial sum of money – a recent case of mine paid approximately $20,000 in anti-detriment. This would not have been paid if the client elected to take proceeds as a terminal illness benefit.