Ask an Expert – How Terminal Illness Benefits Work in Superannuation

National Technical Manager

David Glen

A terminal illness payment from superannuation can provide vital, tax-free funds at the end of life—but it’s a two-step legal and practical process. Understanding both steps helps members and trustees avoid unintended tax and estate consequences.

There are two stages to a terminal illness payment:

Stage 1: Insurance policy rules

The life insurance policy owned by the super fund controls whether an insurer will pay a terminal illness benefit. Insurers typically require two medical certificates, one from a specialist in the condition causing the terminal illness, before the benefit can be paid.

The medical practitioners are required to certify that, in their opinion, the life insured is unlikely to live for more than 12 or 24 months. Some contracts have a 12-month requirement, and other contracts a 24-month requirement.

It is also important to review the policy for any additional conditions before lodging a claim.

If the terminal illness claim is successful, it will be paid to the trustee of the superannuation fund of which the life insured is a member.

Stage 2: Release under Superannuation Industry Supervision Rules (“SIS”)

Stage 2 involves a determination by the superannuation fund trustee whether the benefit can be released under the Terminal Illness Condition of Release contained in SIS. The amount to be released would be any balance standing to the credit of the life insured in the superannuation fund immediately prior to receipt of the insurance claim proceeds, plus the insurance claim proceeds.

The Terminal Illness Condition of Release requires certification by two medical practitioners, one of whom is a specialist in the treatment of the relevant terminal illness condition.

The two medical practitioners are required to certify that, in their opinion, the member is unlikely to live for more than 24 months.

If satisfied, the trustee may release the member’s account balance including any insurance proceeds as a tax-free lump sum to the member.

Tax and estate considerations include:

• Tax advantage: Lump sum terminal illness payments from super are tax-free to the member regardless of age.
• Estate flow: Any unspent funds become part of the member’s deceased estate and are distributed under the will or intestacy rules.
• Potential conflict with beneficiary nominations: Paying the member directly may mean no superannuation death benefit flows to nominated beneficiaries, which can create inequity among heirs and increase the risk of disputes.
• Timing: If the member dies before the terminal illness benefit is received, the terminal illness rules cease operating. The benefit becomes a death benefit and the rules applicable to death benefits apply. Often time is critical in this situation and therefore delays should be avoided if possible.

Practical steps for members and advisers

• Check the insurer’s terminal illness timeframe and other policy terms.
• Arrange the two required medical certificates, ensuring one is from a relevant specialist.
• Review and if needed, update wills and beneficiary arrangements so the estate plan reflects the likely flow of funds.
• Consider whether taking the lump sum terminal illness aligns with family and estate objectives. The lump sum can be used to fund end of life expenses, including the cost of palliative care.

Bottom line

Terminal illness releases can deliver important, tax-free support at a critical time, but they must be handled as part of a co-ordinated plan that aligns insurance rules, superannuation law, tax outcomes, and estate intentions. Advisers in conjunction with the client and other advisers, such as estate lawyers, should ensure that all strategies protect both the member’s needs and their long term wishes.

This information is provided subject to the Disclaimer below.

Disclaimer

The information contained in this article is general information only. TAL, its subsidiaries, and its representatives have not taken into consideration any individual’s personal circumstances, financial needs, or objectives.

If any persons are intending to act on the information contained in any correspondence on this matter, consideration should be given to the appropriateness of this general information in light of their own objectives, financial situation, or needs before acting on the information. Persons should seek professional advice on the application of this information to their specific circumstances.

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