Insurance cover can be zero if unemployed

temporary incapacity SMSF

A gap in employment can reduce an income protection payment to zero if the policy is held within an SMSF at time of claim, an insurance expert has warned.

SMSF advisers and their clients should consider the value of holding temporary incapacity insurance within a fund, particularly if they will be between jobs for a long period, as a claim may return nothing to the member, according to a senior life insurance executive.

MetLife head of advice strategy Jeffrey Scott explained it was possible for an SMSF to hold a temporary incapacity, or income protection, policy within the fund to cover a member, but its efficacy was dependent on the employment status of that member.

“The Superannuation Industry (Supervision) Regulations say temporary incapacity insurance is a non-commutable income stream and it is there to replace your lost income,” Scott said during a presentation late last week at the SMSF Association National Conference 2023 in Melbourne.

“But what is the problem with temporary incapacity inside super? One really big thing is that your client has to have been in gainful employment on the date of disablement.

“That means that if I was made redundant from my job, or I decided to resign from my job and I am starting a new job in two months’ time, in this gap I am not currently in gainful employment.

“If I cross the street and get hit by a bus, can I get paid a temporary incapacity benefit or income protection benefit from my super fund?

“The answer is no because it has to replace my lost income at date of disablement, which at that time was zero. What’s 100 per cent of zero? That’s still zero.”

He noted this did not apply to temporary incapacity insurance held outside of superannuation, which averages a policyholder’s income over the previous 12 months at the time of claim time to calculate the benefit the policyholder will receive.

“When it comes to claims, with temporary incapacity or income protection inside super there’s some things you may have to worry about,” he suggested.

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