TPD, terminal illness vital in advice talks

A properly executed SMSF investment strategy requires appropriate insurance consideration, according to an SMSF expert.

According to Miller Super Solutions educational consultant and SMSF specialist adviser Tim Miller, the onus was on advisers to educate and encourage clients to review their insurance policies surrounding total and permanent disability (TPD) or terminal illness to ensure they were ready once the new super legislation began.

Speaking at the SMSF Association 2017 National Conference in Melbourne today, Miller said that with the introduction of the transfer balance cap taking effect from 1 July, it was an opportune time for clients to review their insurance strategy in their SMSF and gain a better understanding of how best to capitalise on favourable taxation treatment for insurance-based benefit payments under the new superannuation reforms.

He said while much of the industry’s attention on the new super regime had focused on pensions, the transfer balance cap and capital gains tax relief for clients, greater emphasis needed to be placed on other life events – such as TPD and terminal illness – and how they would be affected when made subject to the new legislation.

“Personally, I think insurance is one of those areas that we’re told we have to deal with [but] instead of paying lip service to it, we must ensure that we’ve serviced our clients to the best of our ability based on [life] events going into the future,” he noted.

“In a world where we’re now governed by how much money we can put into superannuation, insurance is not counted in that space, it’s effectively a return on investment … but it’s not treated as a contribution, so we’re not restricted to a $1.6 million cap, we’re not governed by that.

“The subset of that is that insurance itself will count towards the transfer balance cap with regards to paying pensions, so we need to work that into our strategy process.”

He identified structured settlement payments as one of the “reform anomalies” in the legislation that clients needed to be aware of, given they were part of a set of contributions linked to disability-based events that were treated as contributions, but would not count towards the transfer balance cap.

“It means that those structured settlement payments are entitled to the exempt current pension income regardless of their size,” he said.

“But there’s not a great deal of difference between someone getting a structured settlement payment and a TPD insurance payment, so we need to be reviewing this as part of our overall strategy in terms of how it’s going to be affecting our clients.”

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