Facts on Holding Critical Illness Insurance in Super
Critical illness insurance, also commonly known as trauma insurance or major illness insurance, is designed to protect an individual in the advent of a serious illness. A lump sum is paid to cover medical expenses for treating severe health issues such as cancer, heart attack, stroke, and coronary bypass. These are usually the reasons for insurance claims, although trauma insurance policies cover more than these illnesses. Multiple sclerosis, motor neuron disease, major body burns, dementia, and organ transplant may also be covered by the policy.
People used to fund trauma insurance policies through their super primarily because of the cheaper rates. Since the premium payment is deducted from the untaxed income, the take-home pay is bigger.
However, after the new legislation was passed last 2014, trauma insurance can no longer be paid using super since the conditions for policy coverage contradict those stated under the law for releasing super funds.
As the super law states, proceeds from the policies registered inside the super can only be released on the following circumstances:
- Client reaches the retirement age
- Client is transitioning to retirement
Super funds can still be accessed prior to retirement as long as the individual falls under any of these categories:
- Death of the insured
- Permanent or temporary incapacity
- Diagnosis of a terminal condition
- Severe financial hardship
None of these situations coincide with the requirements for trauma insurance coverage. Additionally, suffering from a trauma condition doesn’t guarantee clients that the lump sum payment will be immediately released through their super funds. A breach on the sole purpose test may result with the beneficiary paying up to 46.5% tax just to access the fund.
Delays are also common due to the lengthy process needed to assess the correct beneficiary. This can be challenging for those suffering from total and permanent disability (TPD) since they couldn’t work for months.
There’s also the issue of not being able to guarantee that the death benefits will be delivered to the immediate beneficiaries since the distribution of the funds will be decided by the Trustee of the super fund unless there’s a binding death nomination to be executed.
Furthermore, the limits on the lump sum payment through super may not be enough to cover the medical expenses of the client. The delayed payment of $200,000 may be insufficient to cover the million-dollar expense needed by the beneficiaries to maintain their lifestyle.
Still, superannuation funds can be used to pay for life insurance premiums; there’s no coverage for trauma insurance this time, though. Also, the coverage may not be as far-reaching as individual policies offered outside super.
Some insurance providers offer bundling plans to provide flexibility to clients. Clients who go for this option will only have to deal with a single provider instead of two separate companies for handling insurance inside and outside the superannuation.
Trauma insurance is typically included in life insurance policies offered on plans outside super funds. Individuals are encouraged to get them while they’re still young to avoid higher rates associated with increasing age.