How we conduct our research
As an Australian Financial Service Licence holder, Australian Financial Risk Management has access to the Australian insurance market of risk products. We undertake our own research of the market within our Product & Advice Committee. The Committee consists of experienced Managers, Advisers, Administration and Paraplanning (research) staff.
The Committee meets every quarter to review our list of providers, taking a holistic view of each company including:
□ Stability of the insurer;
□ Insurer products / contracts; and
□ Insurer Performance including:
- Claims management ability;
- Administration; &
Stability of the organisation is paramount. We must have confidence that the insurer selected will be able to fulfil their obligations to the standard necessary, when required.
To assist us in assessing insurer contracts, we have access to the research software of independent research firms LifeRisk Group and IRESS Limited. Research provided is confined to the legal definitions and benefits of the actual contract and are used to assist our internal research staff. No product in the market is perfect. Our Research & Contract Analysis outlines which definitions we prefer when recommending an insurance contract and as such, each contract recommended will have a deficiency in a particular area/s compared to what our research prefers. Our aim is to recommend a contract that meets most of the desirable definitions and to enable you to make an informed decision.
A company’s claims management and administration ability is especially important, in particular how the various companies pay claims and how they handle the claim. With regard to this latter point, we believe it is vitally important to have cover with an insurance company that has an efficient and fair claims department.
In terms of administration, some companies have proven extremely difficult at times to deal with. This poor service can result in an inability to obtain required terms and puts into question the company’s ability to provide adequate assistance at claim time.
In relation to underwriting, some companies have proven to be inexperienced when underwriting certain types of products or certain benefits and some companies have demonstrated an inability to underwrite larger sums insured in a timely and efficient manner.
Claims management, underwriting and administration ability of insurers are important issues and our choice of insurers are based on judgements from our past experience.
Technology is the final aspect that relates to how efficient the insurer’s process is. The more efficient the process is, the less impost there is on you and your time.
Cost is not the driving factor behind our recommendations for the reasons outlined above. For your information we have included an analysis of premiums across the market of insurer’s in an attachment to your Statement (Record) of Advice. This information is for general comparative purposes, providing an indication of cost only and does not take into account any qualitative assessments of product or company performance. The reasons for selecting insurer products will be outlined in your Statement (Record) of Advice and explained to you by your adviser.
Income Protection Analysis
When selecting an appropriate Income Protection contract, the contract definitions are of paramount importance as it is the definitions that will determine whether a claim is payable.
□ Definition of Total Disability – There are a number of different Total Disablement definitions used throughout the market. Today’s leading contracts use a multi-tiered approach that includes a time and/or income based assessment such as:
- “...you are unable to; perform an important income producing duty of your regular occupation; or
- perform the important income producing duties of your occupation for more than 10 hours per week, or
- generate at least 80% of your monthly earnings from personal exertion from your own occupation”.
Only one of the three criteria needs to be met. The leading contracts also do not define an “important duty”. Many “duties based” contracts will define an important duty as being one generating a certain percentage of your income or taking up a certain percentage of your time at work (usually 20% in either case), effectively changing the definition to earnings or time based. It is a requirement under all contracts that you must be under the care of and following the advice of a medical practitioner.
□ Definition to Access Partial Disablement Benefits – The partial disablement clauses in the market place vary from simply a loss of earnings to having been totally disabled for between 7 and 14 days before the insurer will consider paying a partial disablement benefit. Leading contracts pay partial benefits when there is simply reduced earnings, ie you don’t have to be totally disabled to access a partial disablement claim.
To illustrate just how important this partial disablement clause is, consider the scenario of trauma induced grief/depression or an injury or sickness, where you were never totally disabled, but unable to work as normal. Under the Partial Disablement clause of the leading contracts, there need only be a partial loss of earnings to initiate benefits. Under most contracts no payment would have been made.
Contracts with a partial disablement definition based solely on reduced earnings (with no requirement for there to be a period of total disablement) are generally reserved only for “white collar” professional occupations.
□ No Offset Provisions – We believe this an important clause and advise clients that, when available, they need a contract with NO “offset provisions”. Typical offsets are payments made under legislation such as Workers’ Compensation or Accident Compensation schemes.
Other important clauses and conditions are:
□ Waiting Period – The waiting period is the time which must elapse subsequent to suffering a disabling illness or injury before you can make a claim. The waiting period is selected by the insured when applying for the contract.
When on claim payments are received in arrears, generally on a monthly basis. Should you go on claim, the first payment will effectively be received 60 days from when the disability first occurred if you have a 30 day waiting period. Most clients believe their cash flow would be best manageable with a 30 day waiting period.
Any decision to extend waiting period should be made in consideration of cash flow and any leave entitlements. For example if you have a considerable amount of accrued sick, annual or long service leave, a longer waiting period may be appropriate.
A longer waiting period represents a smaller risk to the insurer and consequently results in a lower premium. For comparative purposes, a 60 day wait would reduce premiums by around 15% and a 90 day wait by around 25%.
□ Benefit Period – The benefit period is the duration you will be eligible to continue to receive benefit payments if you remain unable to work. The benefit period is also selected by the insured at application time. Benefit periods extend from two years to age 70 and even lifetime with some contracts. We would normally recommend contracts with an age 65 benefit period, which is representative of a normal working life.
□ Occupational Rating – Occupational ratings are a measure of risk and the poorer the occupational rating, the higher the premium rate used. The occupational rating also has a huge effect on the contracts, benefits and definition wording available to you. Each insurer has their own scale but typically, on a “1 to 5” basis, with the higher ratings reserved for professional occupations allowing access to the better worded contracts and the lowest premium structure.
□ Loadings & Exclusions – Where the insurance underwriters consider there to be an additional risk on the policy due to medical conditions or hazardous pastimes, they may apply either an exclusion, which limits their risk, or a loading which increases the premium in line with the non-standard risk. This will be assessed individually at application time.
Conflicting views often arise between underwriters and applicants/doctors with regard to medical conditions. With the guaranteed renewable, non-cancellable nature of most contracts, underwriters get one chance at assessing an applicant’s current and future health. Doctors on the other hand can constantly re-assess and adjust a patient’s diagnosis or treatment.
“Agreed Value” and “Indemnity” Contracts:
When applying for Income Protection cover, some insurers require you to nominate whether you wish to have an agreedvalue or indemnity contract. The distinction between these two styles of contracts is as follows:
□ Agreed Value: - An agreed value contract is financially underwritten at the time of application and the eligible monthly benefit agreed upon. This monthly benefit (including any increases as a result of yearly indexation) will be paid should you go on claim for total disablement, irrespective of whether or not a reduction in your income has occurred. (Partial benefits are calculated based on the decline in earnings from pre-disability level.)
□ Indemnity: - Under an indemnity contract you nominate the required monthly benefit at application, however your eligibility for this benefit is not financially substantiated. Your eligible monthly benefit will be assessed at time of claim as the lesser of the specified benefit applied for (including any increases as a result of yearly indexation) or 75% of your pre-disability income. The definition of pre-disability income varies between insurers. It can range from being the average monthly income earned over the previous 12 month period before the claim; to income earned for any consecutive 12-month period in the three years immediately prior to the Sickness or Injury occurring.
We generally recommend clients select an agreed value contract however an indemnity contract may be suitable when there is stable earnings. As indemnity contracts represent a smaller risk to the insurer, they can provide around a 15 - 20% premium saving.
Not all insurers presently offer indemnity style contracts and therefore if an indemnity style contract is of interest, it will affect the choice of insurer.
For self employed people their income has the propensity to fluctuate. For this reason we do not believe indemnity style contracts are suitable unless circumstances prevent the life insured from being accepted for an Agreed Value style contract.
Optional added benefits:
Under all Income Protection contracts there are options that add value to your contract, but at an added cost. Listed below are some of the more important optional benefits we believe you should consider:
□ Accident Benefit - This will initiate the monthly benefit from day one (1) should you be injured from an accident. This can be a valuable inclusion and we have had several professional clients on claim as a result of accidents that were paid under this optional benefit.
□ Increasing Claim Benefit - We consider that the “Increasing Claim Benefit” option should be included in the majority of contracts. This option allows your benefit, when on claim, to increase in line with the CPI. This is especially important for long term claims to ensure that inflation does not erode the adequacy of your benefit over time.
Apart from those optional benefits that can be included into a contract at an additional cost, most contracts provide a range of additional “ancillary” benefits built into the contract at no additional cost. These benefits can be of great value to the life insured and we usually recommend clients select a contract with a comprehensive range of ancillary benefits.
The following are examples of ancillary benefits (each insurer has a different range of ancillary benefits. Please refer to the relevant product PDS for full details of benefits provided and terms):
□ Family Member Support Benefit– a reimbursement of lost earnings if an immediate family member ceases work to care for the life insured whilst totally disabled and confined to bed requiring full time care.
□ Nursing Care Benefit – benefit payable if, on the advice of a medical practitioner, the life insured is under the care of a registered nurse.
□ Rehabilitation Benefit – can pay the cost of rehabilitation programs taken for the purpose of retraining or re-education in order to seek a new vocation.
□ Critical Conditions Benefit – will pay six month benefit upon suffering one of the covered critical conditions (traumas, such as heart attack or stroke), regardless of whether the insured is working or not.
□ Recovery Support Benefit – can pay the cost of rehabilitation programs.
□ Specific Injury Benefit – a benefit payable upon suffering a specific injury, regardless of whether the life insured is disabled or working. For example a fracture of the leg below the knee will pay 60 days benefit.
Income Protection owned under superannuation
Income Protection insurance held within a superannuation fund is usually referred to as Salary Continuance Insurance (SCI). Owning Income Protection through a Superannuation Fund is an appealing strategy. This is mainly due to the fact that the premiums for the insurance cover are not funded from personal cash flow but monies that have been contributed to superannuation pre-tax. However, there is no “tax advantage” in this regard, as personally owned Income Protection policy premiums are in fact 100% tax deductible to the policy owner. There are limitations with superannuation ownership of Income Protection which include but are not limited to the following:
- Premium contributions erode the cap on contributions into superannuation
- Premiums can reduce retirement savings within your superannuation fund if they are not offset with additional superannuation contributions or personal savings.
- The superannuation trustee must comply with Trust deed and SIS requirements before releasing benefits and therefore payments may be locked in the superannuation fund.
- Additional benefits to improve Income Protection products may contravene the “Sole Purpose Test” (lump sum payments for specified diseases, travel benefits, clauses ignoring sick leave entitlements).
- The receipt of total and permanent disability (TPD) benefits at the same time as income protection benefits within superannuation may create difficulties. TPD benefits are paid on permanent incapacity, while income protection benefits are payable on temporary incapacity only. The concepts of permanent and temporary incapacity are mutually exclusive, meaning that a permanent incapacity could cause the payment of income protection benefits within superannuation to cease.
- “Agreed Value” contracts may be greater than income earned by the member therefore excess may be locked in the superannuation fund.
“Split” Income Protection polices
Insurance product design has developed considerably in recent times to allow “Split” Income Protection. By “splitting” an Income Protection policy between being owned under superannuation and directly by the insured person, the limitations of superannuation ownership are removed and the advantage of funding the majority of premiums via non-cash flow superannuation monies is retained to a large degree.
The bulk of the cover, being the component that would satisfy a condition of release, sits inside super and those benefits which would otherwise become trapped (any ancillary benefits or excess benefits), are owned directly by the insured person. Essentially it allows one policy to be split between super and non-super ownership.
This structure allows access to “blue ribbon” Income Protection policies while utilising superannuation monies to fund the bulk of the premium.
In the event of a claim, the insurer will first seek to pay the benefit via superannuation (i.e. benefit paid into the superannuation fund then released by the trustees to you). If the circumstances of the claim mean that the fund trustees would not be able to legally release the funds to you, the benefit will be paid direct to you via the non-superannuation policy component.
Death and Total & Permanent Disability insurance owned under superannuation
Most Death cover contracts (also referred to as “Life” cover contracts) are quite simple in their workings. A lump sum of capital is paid out in the tragic event of the life insured’s death.
Contract definitions are therefore not of major concern. Our contract selection is based primarily on cost, including cost benefits associated with “packaging” Death cover with Total & Permanent Disability (TPD) and/or Trauma contracts.
Death cover owned under superannuation
Owning Death cover under superannuation provides a tax benefit, as the premiums paid to the superannuation fund may be tax deductible to the employer (if paid via compulsory superannuation payments or salary sacrifice), tax deductible to the individual (if paid personally) or in the case of self employed persons they may be payable by and tax deductible to the individual or business).
For employees, as well as the tax benefit available under superannuation ownership, there are also cash flow advantages. Owning Death cover under superannuation means the premium is paid from funds that would normally flow into your superannuation fund. The premiums are therefore not an “out of pocket” expense to you and a tax-deductible expense to your employer.
For employees, to access the advantages of superannuation ownership the premium needs to be paid by your employer (essentially a salary sacrifice arrangement or part of the Superannuation Guarantee Contribution). You therefore need to determine whether it is possible to enter into such an arrangement and whether the advantages outweigh the administrative issues in setting up such an arrangement.
The alternative to this is to utilise the “Partial Rollover” method (see page 10 below) or to maintain cover under an existing account-based superannuation fund. Premiums are then simply deducted from the fund’s cash balance.
Post-1 July 2017, new legislation allows employees (except those who are over 65 and do not meet a work test) to utilise the same option self employed people have had, which is the ability to contribute to superannuation and claim the amount as a tax-deduction on your own tax return. There are limits to the amount that can be contributed which are outlined later under the heading Concessional Contributions Caps.
When a self managed superannuation fund is in place, Death cover to be owned under superannuation may be owned by the fund. Premiums are then deducted from the member’s fund balance.
TPD insurance owned under superannuation
Generally speaking, there are a number of major issues involving TPD insurance owned under superannuation. The Superannuation Industry (Supervision) Act 1993 (SIS Act) legislates restrictions to the release of superannuation benefits to individuals, until certain conditions have been met. Permanent Incapacity is a condition of release related to TPD insurance and retirement is also another condition of release to be considered.
This legislation affects TPD insurance benefits in that the definition of “TPD” to satisfy payment from the insurance contract to the superannuation fund needs to align with the legislated definition of “Permanent Incapacity”, to release money from the fund to the individual (for immediate funding needs to pay debts, provide medical care etc…).
Permanent Incapacity means “ill-health (whether physical or mental), where the trustee is reasonably satisfied that the member is unlikely, because of the ill-health, to engage in gainful employment for which the member is reasonably qualified by education, training or experience”.
Essentially, when TPD insurance is owned under superannuation there is a two stage process for payment of benefits at claim time:
1) The superannuation member (claimant) must satisfy the definition of TPD within the insurance contract, the benefit is then paid to their superannuation fund balance.
2) Once the benefit is received by the superannuation fund, the superannuation fund trustee must then determine if that member meets the legislated definition of “Permanent Incapacity” before funds can be released to the member for personal use.
This two stage process can delay the payment, or even complicate it to the point where funds are paid to the superannuation balance, but are not made available to the member for personal use until another condition of release is met (ie permanent retirement, attainment of preservation age, death etc).
Given the restrictions outlined above we will look at how this relates to the major types of TPD insurance.
“Any” occupation TPD insurance
The definition of “Any” occupation TPD, which is the inability to work in any occupation, aligns with the “Permanent Incapacity” definition outlined above and allows the release of funds to the individual under superannuation legislation.
Before 1 July 2014, most “Any” occupation TPD contracts had additional avenues of claim, such as; “Loss of Limbs” or a reference to being “…unable to generate remuneration at a rate greater than 25% of the Life Insured’s earnings during their last 12 months of work”. Neither of these additional avenues of claim aligns with the legislated SIS definition of “Permanent Incapacity”. The real risk is that the “Permanent Incapacity” definition is far more onerous to meet as a large range of menial or low skill occupations may be able to be performed despite any physical or mental disability.
There are also taxation issues with the payment of TPD benefits, which are classified as Eligible Termination Payments (ETP’s). A TPD benefit payable from superannuation is taxed at a maximum rate of 21.5%. The tax treatment of ETP’s is complex and we refer you to your accountant for assistance in this area.
“Own” occupation TPD insurance
The legislated “Permanent Incapacity” condition of release does not align with the “Own” occupation definition of TPD insurance meaning benefits may not be released to the member for personal use. From 1 July 2014, government legislation has banned individuals from commencing any new “Own” occupation TPD contracts within superannuation. “Own” occupation contracts that were entered into before 1 July 2014 will be retained and restrictions on altering these existing benefits (increasing / decreasing cover) will vary from company to company.
If receiving the TPD benefit as a payment from superannuation after retirement, ETP tax may still be payable as outlined above, however this depends on your age at the time the ETP is paid to the member.
“Split” TPD Insurance
This type of insurance combines the benefit of “Own” occupation TPD owned outside of superannuation (see section B-iv Total & Permanent Disablement Analysis), with a portion of the tax and cash-flow funding advantages of “Any” occupation owned within superannuation.
The policy is effectively “split” into a superannuation component and non-superannuation component. In the event of a claim, the insured is first assessed under the superannuation (SIS Act) definition “Any” occupation definition. If they meet this criterion the benefit is paid out via superannuation. If the insured does not meet the “Any” definition, they are then assessed under the “Own” definition, where if they meet this criterion, the benefit is paid to them directly under the non-super component of the policy. There is only one insured amount payable however there is two ways in which that can be claimed, by the “Any” (Super component) or the “Own” (non-super component).
The advantage is that, generally, two-thirds of the policy is paid via superannuation allowing the tax deductible and cash flow advantages of funding via pre-tax superannuation contributions (or partial rollovers). The remaining one-third of the policy is funded personally with after-tax cash flow.
Claim payments are taxed in accordance by way of the component (superannuation “Any” or non-superannuation “Own”) the policy is deemed to be paid.
Payment of super owned policies via the “Partial Rollover” method
Many insurers are now offering partial rollover premium funding. This means that the annual premium can be funded via a partial rollover from any complying super fund. You can keep your superannuation in your current accumulation fund (including industry funds) and simply rollover the required premium to the insurer as and when required.
Premiums paid within superannuation are subject to certain tax concessions, and most insurers will pass this on in the form of a 15% superannuation rollover tax benefit every year you pay via this method, starting from year 1. For example, if the yearly premium is $1,000, you would only need to rollover $850.
Some super funds have restrictions on the number of partial rollovers they allow a member to make in a 12 month period.
What must be considered is that using the partial rollover method will have the effect of reducing superannuation retirement savings if premium costs are not offset with additional superannuation contributions or personal savings. Another consideration is that funds may charge a fee to action a partial rollover request. Any fee will be outlined within your Statement of Advice and considered as part of the recommendations.
AFRM manage the rollover as part of the application process. Please be aware that when paying via partial rollover, the time taken to complete the rollover is dictated by your existing fund. Delays can be experienced when a fund does not act as promptly as we would hope in processing the rollover. Although we always proactively follow up requests for our clients, these delays are beyond our control.
Deductibility of TPD premiums paid by superannuation funds
Superannuation funds are only able to claim a full deduction for TPD premiums where a disability superannuation benefit is provided in line with a regulated superannuation condition of release – ‘permanent incapacity’. This is commonly referred to as the ‘Any’ occupation TPD definition.
Where there is uncertainty as to whether the definition of TPD will always be able to meet the superannuation definition of permanent incapacity, it will be necessary to determine the deductible and non-deductible portion of the TPD premiums. Typically, this will be the case for the following TPD definitions:
- Own Occupation
- Inability to perform activities of daily living (or Loss of Independence)
- Home duties
- Loss of sight or limbs (as part of an “Any” occupation definition)
The extent of the deductibility of TPD premiums, for the different types of TPD definitions, is outlined in the federal government’s Income Tax Assessment Regulations 1997 (reg 295-465.01) and are summarised in the table below:
TPD Any Occupation
TPD Any Occupation with one or more of the following inclusions: a)activities of daily living, b) cognitive loss, or c) loss of limb
TPD Own Occupation
TPD Own Occupation with one or more inclusions (as above).
TPD own occupation bundled with Death (life) cover
TPD own occupation bundled with Death (life) cover with one or more inclusions (as above).
The use of the deductible percentages proposed in the paper is optional for superannuation fund trustees. Fund trustees will have the choice of:
- using the deductible part of premiums if specified in an insurance policy
- obtaining actuarial certification on the deductible portion, or
- applying the statutory deductible percentage proposed in the paper.
Those with Self Managed Superannuation Funds will need to consider the level of deductibility of TPD cover held by the fund when their annual accounts are being drafted.
Effect on tax deductibility of contributions for members:
Superannuation contributions, by law, must go to a complying fund. A complying fund is one that is maintained for a ‘core purpose’ which generally means that the fund provides for retirement benefits or benefits on the earlier death of its members. Once the core purpose is satisfied, ancillary benefits (such as TPD) may be established within the fund.
A member who makes a concessional contribution to a complying fund is still eligible for a personal tax deduction even if the fund contains TPD benefits that are not 100% deductible to the fund. The Trustee of the fund, however, may not be able to deduct the full premium for insurance cover where the benefits exceed the SIS conditions of release. In this case, the superannuation fund may pay additional tax which may result in an increased cost to members.
How much cover can be placed under superannuation?
There is no limit to the amount of capital that can be accumulated and distributed. However, from 1 July 2017, a limit of $1.6M will apply to capital that may be used within superannuation to start a pension. Any excess funds may be retained within the superannuation fund, but they must remain in “accumulation” phase.
The major difference from a tax-efficiency stand-point is that investments earnings are taxed differently dependant on whether the fund is in pension phase (0% tax on earnings) or accumulation phase (15% tax). Given the accumulation rate is generally better than the personal marginal tax rates (for personal income above $18,200 the tax rate ranges from 19% - 45%), the tax-effectiveness of superannuation ownership for large amounts of cover is still generally better than alternate option of personal ownership.
The maximum cover that can be placed is really dependent on the limits imposed by the insurance providers with regard to your personal situation.
Once capital is distributed from superannuation any income earned on the capital is fully taxable to its recipient based on normal marginal rates.
Income streams as a way of distributing benefits (subject to the pension limit outlined above) can be generated within superannuation by way of pensions or annuities for the benefit of beneficiaries. This income may or may not be taxable, depending on the circumstances:
- When the beneficiary is over the age of 60, income received is free from tax.
- However, when the beneficiary is under the age of 60, the income received is taxable and subject to a 15% tax rebate.
- Similarly, if an income stream is received by a dependent child, the income is taxable and subject to a 15% tax rebate.
When a child receives capital in an income stream form (e.g. an allocated pension), the income stream must be commuted to a lump sum by the age of 25 in the child’s name.
Please note that when capital is maintained within the superannuation environment to fund an income stream (such as an allocated pension) all investment earnings within the superannuation fund (funding a pension) are exempt from tax.
In conclusion, all Death cover required can be owned under superannuation for tax deductibility of premiums. Your financial adviser will advise your spouse of the best strategies to adopt in the unfortunate event of a claim occurring.
It should be noted that in the absence of a “binding nomination”, the fund trustees have sole discretion as to how fund assets are to be dispersed. While it can be expected they would consult with your executor/financial adviser with regard to the structure of payments, they are not required to take directives from beneficiaries or their representatives.
For individuals with self-managed superannuation funds, please note that not all trust deeds will allow the simultaneous payment of both a lump sum and pensions to the beneficiaries. In particular, nearly all older deeds don’t allow this as it is a recent strategy designed into the more recent deeds. We generally recommend you place all cover to be owned under superannuation under your self managed fund if this is available. We therefore suggest you check that your trust deed will accommodate the above strategy.
Superannuation benefits can only be distributed tax free / concessionally to “financial dependents”. The definition of financial dependent under the superannuation legislation is quite broad. Spouse/de facto and dependent children are included.
However, there are some individuals who fall outside of the definition. An example commonly seen is adult (non-dependant) children. If it is intended for such a person to receive Death cover proceeds, it may not be appropriate for the cover to be owned under superannuation (or the tax implications should at least be considered and factored in).
Concessional Contribution Caps
Concessional contributions are contributions to superannuation for which a person (or business) can claim a personal tax deduction. This can include premiums paid for insurance policies owned under superannuation, personal self-employed contributions and contributions taken out of your salary before tax (such as compulsory Superannuation Guarantee Contributions or salary sacrifice).
From 1 July 2017 the cap is $25,000 for the total amount of concessional contributions that can be made to superannuation in any one financial year (including an aggregate of all contributions if you have multiple superannuation funds). This cap has been reduced from $30,000 per year for most contributors. Transitional provisions also existed for those aged over 49 and over (at 30 June 2016) where a $35,000 per year cap applied. This has expired and the $25,000 cap now applies to all contributors.
The superannuation fund counts the concessional contribution as income to the fund and is liable for 15% tax on the amount, however if there are deductible insurance premiums payable, this expense will offset any Concessional Contribution “income”, thus reducing the fund’s tax liability.
In addition to the 15% tax on concessional contributions an additional 15% tax (known as Division 293 tax) applies to individuals with an adjusted taxable income of more than $250,000 per year.
Any breach of the concessional contributions cap will attract an Excess Concessional Contribution (ECC) Charge. The amount in excess of your Concessional Contribution cap will be included in your assessable income, taxed at your marginal tax rate and a rate of interest charge applied according to a standard rate of interest.
It is important that you advise us of all concessional contributions you are making to avoid exceeding your cap. Equally important is that if you are receiving advice from another professional (Financial Planner or Accountant) that you notify them of any contributions you are making to superannuation to fund insurance premiums.
Insurance premiums paid via superannuation can either be funded by tax deductible contributions from your salary (or business) or funded by the cash balance of your superannuation fund (for Self Managed, account-based retail superannuation funds, or utilising the partial rollover option).
Where it is appropriate we recommend that premiums be paid via concessional contributions for taxation advantages. In the event that the concessional contributions cap is being fully utilised we may still recommend superannuation ownership where an account-based superannuation fund owns the insurance contract (i.e. a retail or Self Managed) or where we recommend that a partial rollover is appropriate, as the premiums are funded from a non-cash flow and tax-advantaged source.
Total and Permanent Disablement (TPD) Analysis
There are a number of different “assessments” that may be used to define a TPD. There are two obvious “occupation-based” assessments (‘Own’ and ‘Any’ TPD); and then a range of “non occupation-based” assessments. Each insurer has different definitions of what is and isn’t considered to be totally and permanently disabled
Own Occupation TPD
An ‘own occupation’ definition generally means that a claim will be paid if a doctor believes you are unlikely to ever return to your own occupation. Your own occupation is regarded as the one you were engaged in at the time of the injury or illness.
“Own” occupation TPD is generally not available to higher risk occupations and from 1 July 2014, any new contracts with the “own” occupation definition may not be entered into with superannuation ownership. It must be personally owned.
Any Occupation TPD
The “occupation-based” assessment of this tier means that you have to be totally and permanently disabled to work in any occupation for a consecutive six month period (sometimes three months – depending on the insurer) and be expected to never to return to any form of work again.
There are other “non occupation-based” assessments of TPD that fall under the “Any” Occupation TPD umbrella. They include:
1. Permanently unable to perform two of the following 'Activities of Daily Living' without someone else's physical help:
- bathing and showering
- dressing and undressing
- eating and drinking
- using a toilet to maintain personal hygiene
- getting in and out of bed (or a chair or wheelchair)
- moving from place to place by walking, wheelchair or walking aid.
2. Loss of sight or use of limbs.
3. Suffer significant cognitive impairment (dementia-type illnesses).
4. Unable to perform Normal Domestic Duties.
Due to recent changes in superannuation law, any new superannuation TPD policy implemented on or after 1 July 2014 will include the following:
‘and, in all cases, after consideration of all medical and other evidence as The Company may require, the Insured Member has become incapacitated to such an extent as to render him or her unlikely ever to be able to engage in his or her own occupation and any occupation for which he or she is reasonably suited by education, training or experience.’
Trauma Cover Analysis
An illness can cost far more in monetary terms than just the value of the medical bills or health insurance premiums you pay. The disruption to your income stream can wreak havoc with your lifestyle, especially if the illness is prolonged. In the 1960’s when many curative medical procedures were being pioneered, it was observed that although an individual may have been able to overcome major health problems, the impact on his or her socio economic status was so profound that it precipitated another ‘crisis’ for the patient. Insurance companies in the years since have developed a product designed to limit the financial impact of what has since been labelled Trauma, Medical Catastrophe or Critical Illness.
A Trauma contract provides a lump sum of capital in the event the life insured suffers from one of approximately 40 to 50 conditions (varying with each insurance company). These conditions include Cancer, Myocardial Infarction (“heart attack”), and the many Heart Surgery procedures that are available today.
The incidence of people surviving a mild heart attack is increasing. The number of people surviving cancer is also increasing, but these are highly traumatic events that lead people to reconsider their goals, lifestyle and commitment to the workplace. A lump sum of capital at this time can reduce financial pressures to return to a demanding schedule, thus allowing the insured person time to convalesce properly and restructure his or her career to allow for dramatic changes in health. Depending on the level of cover chosen, the benefit may extinguish debt (or a portion of it), allow for medical bills, rehabilitation expenses or fund a specific period out of the workforce while restructuring business commitments or objectives.
When selecting a Trauma product it is important to know, not only the scope of events covered by insurers, but also how each particular event is defined. The definitions themselves will vary from insurer to insurer and be couched in medical terms which can be confusing to the layperson. The differences between definitions may be difficult to imagine without some medical or legal background. Some forms of the illnesses described will be relatively harmless and present little or no financial risk to the individual insured, but then other more serious manifestations of the same illness can be devastating. The insurer’s objective of the definition is to screen out less serious cases from benefit.
Recent statistics reveal that there is a difference between genders on the most claimed events under a Trauma policy, as illustrated below:
Source: AIA Claims Brochure March 2015
Claims statistics by another large insurer (TAL) confirm that Cancer and Cardiovascular Disease (for both genders) are the most prevalent claimed conditions under a Trauma policy.
Source: TAL Reality Checker (TAL's claims data over the last five years) http://talrealitycheck.com.au/
When assessing the quality of a Trauma policy, based on the above it is vital to play close attention to the definition wordings for Cancer and Cardiovascular Disease (particularly heart conditions). The best definitions are those that provide the broadest scope to accommodate a claim.
There are a number of related “events” under each of these critical illnesses. When looking at cardiovascular disease, events such as Heart Attack, Angioplasty, Aortic surgery, and Heart Valve Surgery, are all claimable events (among others).
When considering Cancer, there are a number of “types” of cancers that need to be considered, including those that are gender specific.
Below is a broad overview of important considerations in some of the aforementioned Trauma events.
Heart (Cardiovascular) Conditions:
□ Myocardial Infarction (“heart attack”) – This condition is fairly simply defined as the “death of a portion of the heart muscle as a result of inadequate blood supply”. The variances between contracts relate to the specific medical evidence used to make the diagnosis. Throughout the 1990’s the standard trauma contract would demand that the individual present two such medical tests confirming the diagnosis. First, an ECG showing changes consistent with myocardial infarction and secondly, blood tests that showed elevated “cardiac enzymes”. While most people suffering a heart attack would be able to submit these tests, a problem arose when sometimes one of these tests was inconclusive, for any number of factors. In some contracts, the definition would also demand “typical chest pain”. It became apparent that some people did not suffer “typical” chest pain. Some of these people had trauma contracts from which no benefit was payable.
□ Trauma contract definitions improved to allow confirmation of the diagnosis of heart attack a range of diagnostic tools. A variety of sufficient primary evidence was introduced, with Troponin biomarkers, imaging evidence and medical opinions supporting signs and symptoms consistent with a heart attack (clinical diagnosis) recognised. Whilst having increased their scope substantially, today’s market leading contracts will further allow any other test that provides support of the diagnosis of a heart attack if other tests are inconclusive. This allows trauma contracts to take into account advancements in diagnosis, creating flexibility so that there is no defined reason in the contract to deny a (legitimate) claim, particularly across the long term.
□ Angioplasty – Angioplasty is a non-surgical procedure that relieves narrowing and obstruction of the arteries to the muscle of the heart. This allows more blood and oxygen to be delivered to the heart muscle. Historically, the most common approach to this type of surgery has been via balloon angioplasty. Alternatively, the use of stents has become more common in angioplasty procedures.
The overwhelming majority of angioplasty procedures in Australia are completed on a single vessel, according to the “Australian refined diagnosis-related groups data cubes Australian Institute of Health & Welfare 2014”. In 2009/2010 of a total of 34,694 coronary angioplasty procedures performed:
- 30,347 procedures were single vessel; and
- 4,347 procedures were for 2 or more vessels.
Based on these figures and the current level of benefits payable for each procedure, the quality in definition for this provision is weighted toward single and double procedures. In summary the analysis focuses on:
i) are all current angioplasty procedures covered?
ii) is a partial benefit available for single or double vessel angioplasty?
iii) are multiple claims allowed at the partial benefit level?
iv) is a full benefit payable for triple vessel angioplasty?
□ Aortic Surgery – The aorta is the main artery of the body. It receives blood from the left ventricle (pumping chamber) of the heart and carries the blood to branches which distribute it to all parts of the body. The aorta commences in the chest and extends down through the diaphragm to the abdominal cavity where it extends by dividing into its two final branches.
The aorta can be narrowed in one or more places by an accumulation of fatty deposits or by a blood clot on its wall. This particularly occurs in the arteries low in the pelvis or in the thighs. Narrowing causes cramp on exertion and may mean the person can only walk a few meters. The area of narrowing can be cleaned surgically or can be bypassed using a piece of leg vein or an artificial graft.
A weak spot on the wall of the aorta can lead to bulging (aneurysm), or a split in the wall (dissection). An Aneurysm cam be very large, e.g. size of a large grapefruit and is dangerous because of the wall of the aorta is thinned and will tear easily (dissection). A big tear results in a very quick death. However, many aneurysms leak slowly and can be fixed with urgent surgery. The diseased portion of the aorta is removed and an artificial tube is stitched in place to bridge the gap.
As medical advancements in this area continue to be made, it may be more likely that, in the future, aorta surgery be more regularly performed via key-hole surgery techniques. As a result, definitions that do not specify that these problems be corrected by open heart surgery through the chest wall (thoracotomy) or the abdominal wall (laparotomy) are seen to be more favourable.
□ Heart Valve Surgery – There are four heart valves. All are one-way valves. When a heart valve is not working properly because it has become narrow (stenosis) or if a valve fails to fully close (incompetence) the circulation of blood can be impaired to a degree requiring surgical repair or replacement of the valve.
As medical advancements in this area continue to be made, it may be more likely that, in the future, heart valve surgery will be more regularly performed via key-hole surgery or intra-arterial techniques. As a result, definitions that do not specify an 'open-heart surgery' requirement are seen to be more favourable.
□ Cancer (General) – In general, trauma policies will provide cover for most types of life-threatening malignant tumours including sarcoma, Hodgkin's lymphoma, non-Hodgkin's lymphoma, malignant bone marrow disorders and most forms of leukaemia and other advanced tumours. Areas where cancer definitions often vary across the market are:
Tumours of the colon and rectum are growths arising from the inner wall of the large intestine. Benign tumours of the large intestine are called polyps. Benign polyps do not invade nearby tissue or spread to other parts of the body. Benign polyps can be easily removed during colonoscopy, and are not life threatening. If benign polyps are not removed from the large intestine, they can become malignant over time.
It is important to highlight that some policies will not provide a benefit if the colorectal cancer has not advanced beyond Dukes stage A, whereby the tumour(s) has spread beyond the innermost lining of the colon or rectum to the second and third layers and involves the inside wall of the colon or rectum, but has not spread to the outer wall of the colon or rectum, or outside the colon or rectum.
CHRONIC LYMPHOCYTIC LEUKAEMIA (CLL):
CLL is the term used to describe a group of malignant diseases of the blood system. The disease is less aggressive than other forms of leukaemia.
There are several staging systems that are used to describe the progression of CLL. The most commonly used systems are the Binet Staging System and the RAI Stages. Some cancer definitions may require a CLL to have reached a certain stage before any trauma benefit is paid. Definitions that provide a 100% benefit upon the condition reaching RAI stage 1 are deemed to be more favourable.
CARCINOMA IN SITU:
Generally, cancer definitions within trauma policies require the malignant tumour to have invaded and damaged normal tissue or spread to other parts of the body via the blood stream or lymphatic system. Tumours classified as 'carcinoma in situ' - early form of cancer where malignant cells have not yet invaded other tissues - may not always be covered.
Policies that do provide cover for carcinoma in situ will typically provide a benefit in the event that the tumour results in radical surgery and adjuvant therapy.
SQUAMOUS CELL CARCINOMA OF THE SKIN
Skin cancer is the most common form of human cancer. Most skin cancers if treated early are also not life threatening.
The two most common forms of skin cancer are basal cell carcinoma and squamous cell carcinoma. Unlike basal cell carcinomas, squamous cell carcinomas can metastasise, or spread to other parts of the body.
Most policies will provide cover for squamous cell carcinoma where it has metastasised.
Most companies will exclude full payment for malignant melanomas of “Clark level 1 or 2” and hyperkeratosis or basal cell carcinomas of the skin.
Current market leading contracts will provide a partial payment of a percentage of the sum insured for malignant melanomas less than “Clark level 3” or of less than 1.0mm in thickness, however the superior contracts will now pay a full benefit where ulceration is present at any level or thickness.
In 2010 the AJCC (American Joint Committee on Cancer) revised its staging system for melanomas by removing references to Clark Level in favour of ulceration. While there is a greater probability of a melanoma being diagnosed as Clark Level 3, there is a strong argument suggesting any assessment approach using ulceration instead would provide a greater degree of certainty. Evidence suggests that ulceration is equivalent to having a thicker, more advanced tumour.
The most favourable approach in the market today is the use of all three diagnostic measures – depth of invasion, Clark level, and ulceration, where only one diagnostic criterion must be met in order to claim.
Male Cancer Definition - Cancers of the male genital organs are dominated by prostate cancer, which is the most commonly occurring cancer in men.
Prostate Cancer is determined by both stage and grade. The stage reflects how far the cancer has developed (its relative size) while the grade is how aggressive the cancer is and how quickly it is likely to develop
The grades range from 1 to 5 and the lower the grade the more that they resemble a normal cell. Grade five for example would mean that the cells are badly degraded and grade four, the cancer is generally fast growing and beginning to spread. There are several grading systems, but the Gleason system is the most common. The definitive Gleason score is computed by adding together the primary grade of the largest component with that of the next largest different component; hence it ranges from a score of 2 (the lowest) to 10 (the highest grade of tumour).
Low Risk scores (2 to 6) mean that the cancer cells look similar to the normal cells and are usually less aggressive and much slower to progress. A score of 7 poses an intermediate risk whilst a score of 8-10 means that the cancer cells are highly likely to be aggressive and spread.
Policies differ in coverage in the following areas:
- Level of coverage for simple diagnosis of T1c prostate cancer
- Scope to assess prostate cancer T1 against the requirement for major medical intervention
- Scope to assess prostate cancer T1 against a Gleason Score.
In addition to the prostate cancer clause, the other carcinoma-in-situ sites that are important for male lives are the penis and testicles. The addition of these sites is relatively new in the market of Trauma contracts.
Female Cancer Definition - As all policies will provide cover for invasive tumours of the female organs, the analysis on this provision primarily focuses on whether benefits are payable for carcinoma in situ and, if so, what benefit is payable.
In females, breast cancer is the most common registrable cancer.
While all policies will cover invasive breast cancer, the level of coverage for carcinoma in situ of the breast across the Australian risk market varies considerably. Most policies will provide full cover where the carcinoma in situ results in the removal of the whole breast. Some policies may even provide a full trauma benefit where the carcinoma in situ results in a lesser radical surgery which is followed up with radiotherapy/chemotherapy.
In recent times there has been a trend to also provide a partial benefit for the simple diagnosis of this pre-invasive tumour.
The better contracts will also include Carcinoma-in-situ of the Cervix - uteri, Fallopian Tube, Vagina, Ovary and Vulva.
Insurance company research (AIA Australia Claims Brochure March 2015) finds that over 60% of claims on Trauma are under the Cancer heading so we see this particular area of any contract to be vitally important.
The financial impact of a Trauma would be much the same in many instances as a TPD. The two events differ in that suffering a TPD means that you will never recover and never be returning to work, whereas it is possible to make a full and quick recovery from some Traumas. In any instance it would be a highly traumatic event, which would make you re-assess your goals, work commitments and lifestyle.
A major factor when selecting an appropriate Trauma benefit is that Trauma cover is rather costly. We therefore respect that your decision with regard to an appropriate benefit will be influenced, at least in part, by budget restraints.
You should consider the reason Trauma cover is considerably more costly than other products (Death cover for example) is that there is a significantly higher chance of a claim eventuating.
Prepared on 30 June 2017 by
Australian Financial Risk Management Pty Ltd
ABN 21 001 696 868
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Please note, this information has been prepared by Australian Financial Risk Management Pty Ltd (AFRM) ABN 21 001 696 868. AFRM hold an Australian Financial Services License (AFSL) 237186. AFRM’s Head Office is located at Suite 16a, Eastpoint, 50 Glebe Rd, The Junction, NSW, 2291.
The information is for general purposes only and has been prepared without taking account of your objectives, financial situation or needs.
This information is intended to be used in conjunction with a Statement (or Record) of Advice that will take into account your personal circumstances, goals and objectives (i.e. personal advice). Personal advice provided by AFRM will always be in your Best Interest, both in accordance with our long-standing business principles and legislated requirements.
AFRM recommends that you seek professional, personal advice before acting on any information contained within this document.