Income-protection insurance is vital in order cope with periods of illness, writes George Cochrane.
I AM 49 and have had cancer with a 40 per cent to 50 per cent chance I won't be alive in 15 years. I work full-time, earning $69,000 a year. My financial plan had been to finish my second degree so I could work part-time into my retirement, pay off my HECS and make substantial super contributions. Given stringent rules around access to super benefits even for the terminally ill, my super will remain inaccessible, so I'm reluctant to contribute. Thus I need to accrue easily accessible money to live off should I have a recurrence. I am not eligible for Centrelink payments due to my partner's income. However, my partner's financial commitments elsewhere means there is no money left to support me. I have: $50,000 in PSS $20,000 in FSS with a $75,000 death and disability benefit $35,000 in HESTA with an income protection provision of $850 a month and $2000 in Health Super with a $457,000 disability and death benefit. I have $50,000 in a deposit, $15,000 in the bank and aim to save $25,000 a year. My HECS debt is $17,000. How do I provide for the future? D.P.
Maximise the salary continuance insurance options in your super funds as this may be sold without individual health checks. You are entitled to combined income-protection benefits totalling 75 per cent of previous salary before the life companies cut back on any benefits claimed. See if you can increase your income-protection benefits, across all your super funds, to about $4000 a month.
You are correct that a lump sum paid from "total and permanent disability" policies within your super funds is only payable in the event of terminal illness. If that stage is ever reached, you should have been able to claim on salary continuance long beforehand.
Claims made on death cover within super can be insanely complicated, although if paid to a de facto spouse or other "tax dependant", then it is tax-free. Don't forget that a former spouse can also have a claim on your super, as can children, so if there are any problematic family members, be sure to place binding death-benefit nominations either in favour of your estate or your partner.
Where a super fund member, who holds life insurance through super, dies, the resulting lump-sum death benefit may consist of (1) a tax-free component plus (2a) a taxable component (taxed element) and/or (2b) a taxable component (untaxed element). In simple terms, the latter represents the period until your future retirement, usually age 65, so the younger the person is, the greater the untaxed element. If not paid to a dependant, for example, a spouse or child under 18, then component (2a) is taxed at 16.5 per cent and (2b) at 31.5 per cent, applying to the entire super benefit, not just the insurance payout. It's a governmental rip-off. You could benefit from talking to a professional life agent.
By all means keep an amount outside of super, but balance your options by salary sacrificing, say, $20,000 a year into super. You can also get a tax deduction by buying income-replacement cover outside of super, if it is available. With regards to your HECS/HELP debt, note that if a person dies, any compulsory repayment will be payable until death but the remainder is cancelled.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW 2026. Helplines: Banking Ombudsman, 1300 780 808 pensions, 13 23 00.
Frequently Asked Questions about this Article…
How much income protection insurance should I aim for as an everyday investor?
A common guideline from the article is to target combined income-protection benefits of up to about 75% of your pre-illness salary. For many people that means maximising salary-continuance or income-protection options in your super funds and across policies so you have a reliable monthly replacement (the article suggests, for one example, aiming for around $4,000 a month if that matches your income needs).
What is salary continuance insurance in super and how does it differ from other income protection cover?
Salary continuance is a form of income-protection sold through super funds that pays a regular benefit if you can't work. The article notes it can sometimes be sold without individual health checks inside super, and that you can combine salary-continuance benefits across super funds to reach the typical 75% of prior salary replacement.
Can I get a lump-sum payment from total and permanent disability (TPD) cover inside super?
According to the article, lump-sum TPD payments within super can be very restrictive and may only be payable if a terminal illness threshold is met. In practice you should expect to rely on income-replacement (salary-continuance) benefits well before any terminal-illness TPD lump sum becomes payable.
How are death benefits from my super taxed and who gets them tax-free?
A super lump-sum death benefit can include a tax-free component plus two taxable components (a taxed element and an untaxed element). If the benefit is paid to a tax dependant — for example a spouse or de facto partner — it is typically tax-free; if it’s paid to a non-dependant the taxed element is generally taxed at 16.5% and the untaxed element at 31.5% (the untaxed portion tends to be larger for younger members).
How can I make sure my super death benefit goes to my partner and not other family members?
The article recommends placing binding death-benefit nominations with your super fund in favour of your partner or your estate. This is important because former spouses and children may otherwise have a claim on your super — a binding nomination helps direct the payout to the people you want to receive it.
Should I keep savings outside super if I worry about needing accessible money during illness?
Yes — the piece advises keeping an amount accessible outside super because super can be inaccessible (even for the terminally ill) until very specific conditions are met. At the same time you can balance that by salary-sacrificing into super (the article gives an example of $20,000 a year) and consider whether income-replacement cover outside super (which may offer a tax deduction) is available to you.
What happens to my HECS/HELP debt if I die or become seriously ill?
The article explains that compulsory HECS/HELP repayments are payable until the point of death, after which any remaining HELP debt is cancelled. That means death stops future compulsory repayments and the outstanding balance is written off.
Should I speak with a professional life agent or financial adviser about death cover and income protection?
Yes — the article suggests you could benefit from talking to a professional life agent because claims and tax rules for death cover and TPD inside super can be complex. If you need formal help there are also consumer helplines (for example the Banking Ombudsman and pensions helplines cited in the article) you can contact for guidance.
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