Michael Forer
Technical

How insurance in super can boost Centrelink entitlements

By Michael Forer, Technical Services Consultant

Many of the benefits of owning insurance in superannuation are well documented. However, one benefit that is often overlooked is the impact on Centrelink entitlements.

Below are two case studies demonstrating the potential Centrelink benefits of owning income protection policies within superannuation.

1. Lump sum compensation payment

As a result of a debilitating medical condition Arthur, 32, is no longer able to work. Fortunately he had an income protection policy in place and the insurance company elected to pay him a lump sum amount of $325,000. Arthur subsequently used the bulk of the proceeds to purchase a new home for himself and his mother who was his carer.

Arthur approached Centrelink to apply for a Disability Support Pension, however he was advised that he had a Centrelink Preclusion Period of four years before he would be eligible for any Disability Support Pension.

Centrelink Preclusion Period

A ‘compensation payment’ is defined in section 17(2) of the Social Security Act 1991 (Cth) as “a payment of damages or compensation, made with or without admission of liability, in respect of personal injury, that is made wholly or partly in respect of lost earnings or lost capacity to earn”.

Only 50 per cent of the gross lump sum payment will be regarded as being for compensation (unless the payment arises from a contested court or tribunal hearing, in which case Centrelink will use the court’s apportionment of lost earnings and lost capacity to earn as a basis to determine the compensation component of the lump sum).

The number of weeks in a Preclusion Period is calculated by dividing the compensation part of the lump sum payment by the weekly cut-off limit for a single rate pension under the income test applicable at the date of settlement ($788.75 as at 20 March 2009).

Therefore, in the case of Arthur, his preclusion period was calculated as follows:

$325,000 x 50% = $162,500

$162,500 / $788.75

= 206 weeks (approximately 4 years)

Money paid from a private insurance policy will not normally be counted as compensation. However, payments under these policies may cause social security payments to be affected by the income and assets test.

A better option: superannuation

Had Arthur received the same compensation payment of $325,000 in his superannuation fund, the Centrelink preclusion period would not apply and he would be eligible for a full Disability Support Pension of $569.80 per fortnight.

In addition, any lump sum withdrawals from his superannuation fund would not be assessed as income by Centrelink.

2. Periodic compensation payment

As a result of a medical condition, Kelly was unable to continue working and received a fortnightly payment from her insurance company from the Income Protection policy that she owned. Kelly’s pre-disability earnings were $70,000 p.a. so the insurance company is now paying her $2,019.23 per fortnight (75% of $70,000).

Kelly applied for a Disability Support Pension and her husband Carl, who stopped work to care for her, applied for a Carer Payment. Unfortunately for both of them, they were informed by Centrelink that they were not eligible for either payment.

Centrelink Treatment

Compensation payments made periodically for lost earnings will reduce the beneficiary’s social security payments by one dollar for every dollar of compensation that they receive.

The partner of a compensation recipient may also have their social security payment reduced if the recipient’s benefit is reduced to nil and there is still an amount left over. The left over amount is treated as ordinary income of the partner.

Therefore, because Kelly’s income protection is greater than the maximum pension amount ($475.90 per fortnight) she is not eligible for any Disability Support Pension. The excess income protection $1,543.33 (i.e. $2,019.23 - $475.90) is treated as ordinary income under the regular income test for Carl when calculating his carer payment entitlement.

A better option: superannuation

If the income protection payment was paid by Kelly’s superannuation fund, the ordinary income test rules would apply and her entitlement would not be reduced on a dollar for dollar basis. Given the current income test threshold for part pension is $2,634.50 per fortnight, Kelly will now be eligible for a part Disability Support Pension.

Importantly, Kelly will also be eligible for a Pensioner Concession Card which is extremely valuable for somebody with a medical condition. Carl will also be entitled to a carer payment.

Summary

There are many factors that are often overlooked in determining the most appropriate ownership vehicle for insurance, and in particular, the impact this has on Centrelink support. The examples in this article demonstrate a potentially significant benefit of owning insurance within superannuation that should be factored in when making the ownership decision.