Self-managed superannuation fund (SMSF) trustees looking to take out income protection insurance inside their funds need to be mindful of the wording contained in the Superannuation Industry Supervision (SIS) Act if they are to avoid a counterproductive outcome, an insurance specialist said.
CommInsure national technical manager Peter Rushbrook said the specific part of the legislation considered problematic is Schedule 1 Item 109b.
This section states: "a non-commutable income stream cashed from the regulated superannuation fund for: (b) a period not exceeding the period of incapacity from employment of the kind engaged in immediately before the temporary incapacity."
"What happens if the client is unemployed before they go and claim? I don't know. That says immediately before temporary incapacity so there is a potential issue here," Rushbrook said.
In his attempts to achieve better clarity regarding the legislation, Rushbrook has sought various legal opinions, none of which produced a consistent interpretation.
For example one interpretation was 'immediately' could mean up to 12 months before the temporary incapacity event while other views disagreed with this timeframe.
"As a trustee if you had to pay a temporary incapacity benefit, and you were being true to the words, that's immediately. So if your client was unemployed the day before they became totally disabled, and eligible for a benefit under their income protection contract, they could get 100 per cent of how much? Zero," Rushbrook said.
"When you're unemployed you generally don't earn any money so there is a bit of a risk."
Rushbrook also highlighted that there is no mention of CPI adjustments for temporary incapacity payouts in this part of the SIS Act and this omission could further complicate matters.
"In basic income protection policies if you have a long-term claim the increasing claim benefit will normally pay CPI," he said.
"Let's just assume it's 3 per cent. After about seven years all of the extra CPI [adjustments] that go in place, what happens to them? They may well be locked in the fund because you cannot go over 100 per cent of what the client was earning immediately before they became disabled."
According to Rushbrook, these are issues trustees and advisers alike need to be aware of as taking out income protection insurance within super remains a powerful strategy for cashflow purposes.
