PERSONAL RISK INSURANCE – NON SUPERANNUATION

Question 1

Income protection insurance provides protection against which of the following:

a. Loss of income due to being made redundant

b. Temporary inability to work because of illness or accident

c. Injury resulting in death

d. Being diagnosed with cancer but still able to work

Question 2

Which of the following is NOT a feature of an income protection policy?

a. Usually offers cover for up to 75% of the insured’s gross wages

b. Has a waiting period which is the period of time the insured person must wait before claim payments start

c. Has a benefit period which is the period of time through which the insured person will receive regular payments

d. The shorter the waiting period and the longer the benefit period, the cheaper is the policy

e. The premiums are generally tax deductible to the owner of the policy

Question 3

Which of the following statements is correct? Total and Permanent Disability insurance:

a. Will be paid where the insured has taken out private health insurance

b. Provides a lump sum in the event of a claim which is not generally assessable to tax if it is not for the benefit of a member’s superannuation fund

c. Provides a  regular  income  to  the  insured  in  the  event  of  being  diagnosed  with  a  traumatic illness

d. Can be taken out inside a member’s superannuation fund in the name of the individual

Question 4

Risk insurance remuneration is generally by way of product commissions paid by the product supplier to an authorised representative via their AFS Licensee.  There are a number of conditions for new policies that must be met for the commissions to be treated as non-conflicted remuneration.  Which of the following is NOT one of those conditions?

a. Commission caps from 1 Jan 2020 of 80% (upfront) and 20% (trailing) of policy cost

b. The policy must be subject to legislated ‘clawback’ (commission recovery conditions) in the event the client cancels the policy within 2 years

c. Commission caps from 1 Jan 2020 of 60% (upfront) and 20% (trailing) of policy cost

d. It cannot not be a group life risk policy inside superannuation or an individual life insurance policy for the benefit of a member of a default superannuation fund

Question 5

Term life insurance policies allow the insured person to nominate one or more beneficiaries.  Which of the following statements is NOT correct?

a. The insured person must be either the policy owner or the life insured to make a valid nomination

b. A nominated beneficiary(s) can be an individual, corporation or trust

c. If a nominated beneficiary dies before you, the portion of the benefit nominated in respect of that beneficiary will be paid to your Legal Personal Representative (i.e. Executor of your Will)

d. A nominated beneficiary has no rights under the policy, other than to receive the nominated policy proceeds after a claim has been admitted

Question 6

Which of the following personal risk insurance policies is most likely to pay a lump sum in the event of a heart attack which results in the insured person surviving and being unable to work for 8 weeks?

a. An income protection policy

b. A trauma (critical illness) policy

c. A Total and Permanent Disability policy

d. A term life insurance policy

Question 7

A term life insurance policy can be owned by a person or entity other than the insured person.  In this case, the policy owner pays the premiums and all claim proceeds are paid to the policy owner, not the insured person.  In the following situations, which of the following insurance applications where the policy owner is different to the insured person is NOT likely to be accepted by an insurer?

a. The spouse of the insured person is the policy owner

b. An adult child of the insured person is the policy owner

c. The insured’s employer is the owner of the policy where the insured is a key person the employer’s business

d. The former spouse of the insured person is the policy owner but has not signed the application

Question 8

Total & Permanent Disability policies and Trauma insurance policies both pay out a lump sum when the insurer accepts a claim.  The claim proceeds may be used for which of the following purposes?

a. Medical and therapy costs not covered by health insurance

b. Repay debt

c. Adjustments to housing e.g. widen doorways, install ramps

d. All of the above

Question 9

Which of the following statements about personal risk insurance is NOT correct?

a. Both stepped premiums and level premiums may be considered for all (non-superannuation) policies

b. Trauma (critical illness) insurance is available in both superannuation owned and individually owned policies

c. All policies have an expiry date after which the policy is cancelled and no claim can be made

d. Income protection policy premiums are generally tax deductible to the policy owner and the monthly claim payments are assessable as income

Question 10

Which of the following statements is NOT correct in regards to taxation of risk insurance claim benefits?

a. A trauma policy claim paid to a self-insured individual is generally not taxable

b. Proceeds of a term life insurance (death) will incur CGT if received by anyone other than the original owner and that person / entity acquired the policy for consideration (i.e. money or valuable benefit changed hands)

c. The proceeds of a TPD or Trauma policy will incur CGT unless the claim proceeds are received by person insured or the insured’s (defined) relative; or by a trust for the benefit of the insured or defined relative

d. In the case of b) and c) above, the premiums are tax deductible

ANSWERS

1b – An income protection policy is related only to the non-ability to work because of accident or illness, regardless of the cause.  The cause may well be cancer but the policy won’t pay out unless or until the ability to work is affected.  It won’t automatically pay in the event of unemployment although some policies will pay through short periods of unemployment. Generally speaking, death is not an insured event in an income protection policy, although some policies to pay a small sum if the life insured dies.  Life insurance (death cover) is the appropriate policy to provide financial protection in the event of death.

2d – The shorter the waiting period and the longer the benefit period, the more expensive is the policy

3b – TPD insurance is generally paid as a tax free lump sum or a series of lump sum payments but is potentially taxable when paid to a member’s superannuation fund

4a – These commission caps related to the 2018 calendar year

5a – The insured person must be both the policy owner and the life insured to make a valid nomination

6b – An income protection policy is also likely to pay but it won’t be a lump sum. It will be a regular (e.g. monthly) payment.  It is also worth noting that the insured person must survive the trauma / critical illness event, generally for a minimum of 14 days, to receive a trauma insurance payout.  Otherwise it will be treated a death claim on a life insurance policy.

7d – Both the insured person and the policy owner must sign the application.  In practice, each fills in a separate part of the application form

8d – Generally no restrictions on how claims proceeds are used

9b – Trauma insurance is not permitted in superannuation as it does not meet the sole purpose test of superannuation – “Every Australian superannuation fund must be maintained for the sole purpose of providing retirement benefits to its members, or to their dependants if a member dies before retirement.”

10d – Both policies are regarded by the ATO to be capital in nature therefore the premiums (being paid well in advance of any potential CGT event) are not tax deductible.