To take the quiz and earn CPD for this article, you will need to read the corresponding article 'The long game of investing' - the quiz questions relate to both articles.

This article looks at the different types of TPD definitions under retail and group cover and when they would be used, and the impact of the Stronger Super changes on policy structure.

In 2015, the life insurance industry paid more than $1.57 billion in Total and Permanent Disability (TPD) claim amounts*1*. That’s almost double compared to the amount paid in 2014*2*. The most common reasons for TPD claims remain the same across both years – musculoskeletal issues, mental health disorders, and cancer*1, 2*.

While we have some understanding of the reasons for TPD claims, we don’t often see what the underlying definitions are, and therefore, the relevance of particular types of policies.

Retail TPD definitions

Retail insurers will generally offer four types of TPD cover:

• Any occupation;
• Own occupation;
• General cover; and
• Home duties/home maker.

Home duties/home maker policies are generally only available to particular clients, for example, those who work less than 20 hours per week. General cover TPD policies are available to working and non-working clients, but may be less appealing to workers, and therefore, is usually only recommended to these clients if they are unable to obtain occupation-based cover.

Any occupation TPD cover

Any occupation TPD cover is the most common type of TPD policy used for working clients. A typical super or non-super TPD definition may be similar to the following:

“sickness or injury which has prevented the insured person from working in their own occupation for at least three consecutive months; and the three month period has ended before the review date on or following the insured person’s 65th birthday; and the sickness or injury makes it unlikely that the insured person will ever again be able to work in any occupation for which they are reasonably qualified because of education, training or experience.”

The first arm of the definition states the required waiting period that must have elapsed, in which the insured person must not have been able to work in their occupation. The shorter the waiting period, the more generous the policy.

The second arm of the definition is aligned with the permanent incapacity condition of release, allowing release of insurance proceeds to the member when an any occupation TPD policy is owned inside super.

Regulation 1.03c of the Superannuation Industry Supervision Regulations 1994 (SIS regulations) states:

“a member of a superannuation fund or an approved deposit fund is taken to be suffering permanent incapacity if a trustee of the fund is reasonably satisfied that the member’s ill-health (whether physical or mental) makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience.”

Generous non-super any occupation TPD policies will also allow full payment when the insured person is working in another occupation for which they are qualified for, but has significantly reduced income compared to what they were earning prior to the disability.

This is only allowable on non-super policies, as the permanent incapacity condition of release (or any other relevant condition of release) would not be satisfied in these circumstances. That is, the insured person is still able to engage in gainful employment for which they are reasonably qualified by education, training or experience.

Usually, a retail any occupation TPD definition is underpinned by the general cover TPD definition.

This is discussed in the ‘General cover TPD’ section below.

Own occupation TPD cover

Own occupation TPD cover may be recommended when a client has a specialist occupation, for example, a surgeon. This allows a payment to be made if the insured person is unable to continue in their present occupation, but may be able to work in another occupation.

A typical own occupation TPD definition is as follows:

“sickness or injury which has prevented the insured person from working in their own occupation for at least three consecutive months; the three month period has ended before the review date on or following the insured person’s 65th birthday; and the sickness or injury makes it unlikely that the insured person will ever again be able to work in their own occupation.”

In comparison to an any occupation policy, an own occupation policy provides a definition where the insured person can qualify for payment more easily. This needs to be balanced with the additional cost of an own occupation policy, as it is approximately 50 per cent more expensive than an equivalent any occupation policy.

Like any occupation cover, a retail own occupation definition builds on a base level of cover provided by a general cover definition.

General cover TPD

General cover TPD is usually available to both workers and non-workers. A worker may choose this type of cover because they are unable to obtain an any or own occupation policy, due to their hazardous pastimes or occupation.

As mentioned above, general cover provides the base level of TPD cover for occupation-based cover.

It requires the insured person to be very severely disabled to qualify for payment.

General cover TPD policies can provide cover in three different ways. The insured person may qualify for full payment if they:

• are unable to perform at least two activities of daily living (for example, bathing, dressing, toileting, mobility, continence, feeding);
• have suffered from a loss of limbs or sight (for example, either two limbs, sight in both eyes, or one limb and sight in one eye); or
• have suffered from a significant cognitive impairment.

An insured person may be able to qualify for payment under any of the above criteria.

Home duties TPD

Home duties definitions are usually offered to clients who either do not work, or work limited hours.

The adviser’s recommendation is based on the cost involved in paying a professional to perform household duties, if the insured person becomes unable to due to a disability.

There may be a waiting period that applies, and a requirement that the client is unable to perform normal household tasks, such as cooking, cleaning, shopping and caring for children.

As the case with occupation-based cover, home duties cover is supported by general cover TPD.

Partial payments

A retail non-super TPD policy may offer a partial payment upon the insured person suffering from a loss of one limb or loss of sight in one eye. The payment will be limited to a percentage of the sum insured, up to a maximum limit, for example, 25 per cent of the sum insured, up to $500,000.

A partial payment is only available on non-super policies, as it would not meet the permanent incapacity condition of release (or any other relevant condition of release).

Group TPD definitions

As most group insurance is offered inside super, this limits the type of TPD definitions available to any occupation, general cover and home duties.

The definition that the insured person is assessed under may depend on whether they are employed immediately or shortly before they become disabled.

If unemployed, they may be assessed under a general cover definition, which is harder to satisfy than an any occupation definition.

This differs from retail cover, as the definition that the insured person obtains at commencement of the policy, is the definition under which the claim is assessed. With retail policies, general cover is offered as an alternative way to qualify for payment.

Another difference may be that a group any occupation definition will not allow a partial payment, nor a payment if the insured person is able to work in another role at a reduced salary, due to super law restrictions.

You may also see a longer waiting period on group any occupation TPD policies compared to retail policies.

Group any occupation TPD policies have evolved over recent years to include variations, such as retraining and voluntary clauses. An example is provided below.

“You will be considered totally and permanently disabled if:

• due to your illness or injury, you haven’t been able to work in any occupation for at least six months immediately after you became ill or injured, and
• you are following the recommendations of a medical practitioner, and
• your injury or illness means that it is unlikely that you will ever be able to work in any occupation that you are suited to based on your previous education, training or experience, or that you may reasonably become suited to with further education, training or experience.

This will be decided by considering any rehabilitation, training or voluntary work you’ve done already, or that you could be reasonably be expected to do.”

While uncommon, some will also require the insured person to meet both an activities of daily living and inability to work criteria, to receive full payment.

Therefore, the TPD definition within group policies that include these additional specifications are no longer recognisable as what is widely regarded by industry as a standard any occupation TPD definition.

Stronger super measures

Since 1 July 2014, super fund trustees have been unable to offer insurance unless any proceeds payable are releasable under one of four conditions of release. These are:

• death;
• terminal medical condition;
• permanent incapacity; or
• temporary incapacity.

The condition of release most aligned with TPD policies is permanent incapacity.

What this means is that any new TPD policies inside super are restricted to those with an any occupation, general cover or home duties definition, with an additional clause included to ensure that the permanent incapacity condition of release is satisfied.

Prior to 1 July 2014, a wider range of TPD policies were offered inside super, including own occupation, with the percentage of premium that can be claimed as a tax deduction by the super fund trustee dependent on the underlying definition.

In lieu of obtaining an actuarial certificate, regulation 295.465.01 of the Income Tax Assessment Regulations 1997 (ITAR) dictates the tax deductible proportion of premiums paid by the trustee.

This is relevant not only for retail super funds, but also self-managed super funds (SMSFs). The relevant percentages are shown in Table 1.

Table 1

Description	Structure	Tax deductible proportion (%)
Any occupation TPD	Standalone or linked with term life cover	100%
General cover or home duties TPD (with an any occupation clause)	Standalone or linked with term life cover	100%
Own occupation TPD	Standalone	67%
Own occupation TPD	Linked with term life cover	80%

 

Any policy that commenced prior to 1 July 2014 is able to remain in super, with the flexibility to increase or decrease the sum insured at any time. This brings into focus not only the value of legacy own occupation policies inside super, but also the associated issues.

There are reasons why own occupation TPD policies were recommended inside super prior to 1 July 2014. The premium could be funded from pre-tax income or the accumulated super balance, and proceeds could be released under any other condition of release under Schedule 1 of the SIS regulations, if the permanent incapacity condition of release was not satisfied.

Therefore, if the client was close to their preservation age, and therefore likely to meet the ‘retirement’ condition of release, this was a valid strategy.

The issue arises when a client’s circumstances change, resulting in a restriction of cover.

SIS regulation 4.07D states that the prohibition of certain insurance policies does not apply to “the continued provision of benefits to members who joined a fund before 1 July 2014.”

Therefore, if there is a cessation of cover, even if momentarily, these policies will no longer be retainable inside super.

Example

Mr and Mrs Smith are members and trustees of the Smith Family SMSF. In 2013, upon the recommendation of their financial planner, Bob Smith commenced an own occupation TPD policy inside the SMSF.

In the last few years, the time and effort involved in performing their duties as trustees has proved too onerous, and the cost of an administrator was too high.

Therefore, Mr and Mrs Smith have decided to wind up the SMSF. Bob would still like to own his TPD policy wholly inside super, so that the effect on his disposable income is minimised.

The TPD policy will need to be cancelled and reissued, and therefore, benefits have not ‘continued’ per SIS regulation 4.07D. Therefore, Bob must settle for an any occupation TPD policy inside super.

In the example above, we illustrate that if occupation-based cover is required, only any occupation TPD cover is now available inside super. For clients who still need an own occupation definition and will pay a proportion of premium from non-super money, this can be provided through a linked policy outside super.

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 will be subject to potential superannuation lump sum tax. If they do not qualify under the any occupation TPD definition, they will then be assessed against the own occupation TPD definition.

Table 2

Inside superannuation	Outside superannuation
Standalone TPD policy > TPD benefit (any occupation TPD)	Super Plus TPD Benefit > Own occupation TPD portion

 

This could also be structured such 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. The majority (approximately two-thirds) of total TPD premium is funded inside super, and the remainder is paid from a non-super source.

Summary

TPD policy definitions vary widely, as they are created to suit a broad range of clients. Each client segment will suit a particular definition more so than others, and that definition dictates the environment in which it can be owned.

Financial planners who are reviewing a client’s insurance portfolio should be well versed on the implications of changing cover, as own occupation policies can no longer be reissued wholly inside super.

Footnotes

1. 1.The Risk Store: Industry Stats 2015.
2. The Risk Store: Industry Stats 2014.

To take the quiz and earn CPD for this article, you will need to read the corresponding article ‘The long game of investing’ – the quiz questions relate to both articles.

QUESTIONS

For 0.5 CPD Hours (Critical Thinking), go to fpa.com.au/cpdmonthly and answer the following questions correctly.

1. Own occupation TPD policies can be owned inside super if:

1. the policy commenced after 1 July 2014.
2. the policy commenced after 1 July 2014 and cover has continued to date.
3. the policy commenced prior to 1 July 2014 and cover has continued to date.
4. the policy is split – with the own occupation portion inside super and the any occupation portion outside super.

2. Retail general cover TPD is usually based on the:

1. insured person’s inability to perform activities of daily living.
2. insured person suffering from a loss of limbs or sight.
3. insured person suffering from significant cognitive impairment.
4. any of the above.

3. Underpinning own occupation TPD cover is:

1. any occupation TPD cover.
2. any occupation TPD cover, if linked with term life cover.
3. home duties TPD cover.
4. general cover TPD.

4. The proportion of tax deduction available to a super fund trustee for premiums paid for an own occupation TPD policy linked with term life is:

1. 100 per cent.
2. 80 per cent.
3. 67 per cent.
4. 0 per cent (as new own occupation TPD policies are not offered inside super)