Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 278

How to access terminal illness benefits

If a super fund member is terminally ill, they may be able to receive a tax-free lump sum from their super fund. Many funds also allow a death insurance benefit to be paid early too.

In this article we explain some of the pros and cons of terminal illness benefits.

Early release

A member’s benefit can be released early if the member has a terminal medical condition which meets the following conditions of release:

  • Two registered medical practitioners certify that the member suffers from an illness, or has incurred an injury, that is likely to result in the member’s death within 24 months or less (the Certification Period)
  • At least one of the medical practitioners is a specialist practicing in an area related to the illness or injury
  • The Certification Periods have not ended

Preservation

The member benefits that exist at the time of meeting the condition of release or accrue during the Certification Period become ‘unpreserved’ which means they can be accessed. Any benefits that accrue after the Certification Period ends remain ‘preserved’ and cannot be accessed until the member meets a further condition of release.

Insurance

Many insurance policies allow a member to claim a death insurance amount if they meet the terminal medical condition of release. Generally a member can only claim a death or permanent disability benefit once.

Prior to 1 July 2015, the terminal medical condition certification period was 12 months. Although the condition of release extended the period to 24 months, many insurance policies are only increasing the period in their policy definitions when policies are renewed. This means some members with a 24-month certification period may not be able to claim insurance benefits.

Payments

The tax treatment of a terminal illness benefit depends upon how the benefit is paid.

If a lump sum payment is made during the certification period it is tax free, regardless of the member’s age. Any balance remaining after the Certification Period ends will be taxed as an ordinary member benefit where tax will depend upon the member’s age. If a member previously applied for a benefit under another condition of release and PAYG tax was deducted, the member may provide the trustee with the terminal illness medical certificates. The certificates must state that the member satisfied the terminal medical condition definition at the time the original payment was made or within 90 days from receiving the payment. The trustee may then request a refund of the PAYG tax deducted from the ATO and make an additional payment to the member.

Claiming a tax-free terminal illness benefit can help members who have non-tax dependant adult children as the likely recipients of a death benefit. A death benefit paid to an adult child will be taxed at 17% of the taxable component. An amount paid as a terminal illness benefit can be withdrawn tax free and gifted to the children before death or paid as non-super monies via the estate (and therefore not subject to tax).

If the member chooses to receive a pension benefit, the benefit is taxed as a normal superannuation pension, there are no tax concessions for a terminal illness pension.

Rolling over

Although superannuation law allows a terminal illness benefit to be rolled over to another fund, such rollovers are not rollover superannuation benefits under tax law. This means if a terminal illness benefit is rolled over, the transfer is not treated as a rollover but as a personal member contribution.

The paying fund is treated as having paid a benefit to the member for tax purposes and the member is deemed to have been paid a tax-free lump sum. The receiving fund is then treated as having received a personal contribution from the member.

The amount will therefore count towards the member’s concessional and/or non-concessional contributions cap, depending on whether they may have been eligible to claim a tax deduction for some of the contribution.

Summary

Understanding the requirements to claim a terminal illness benefit may help members with their tax planning and avoid potential pitfalls of rolling over. For more information, please speak with your financial adviser.

 

Julie Steed is Senior Technical Services Manager at Australian Executor Trustees. This article is in the nature of general information and does not consider the circumstances of any individual.

  •   30 October 2018
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

How to shift into pension mode

Terminal illness and your super

Are you paying tax by not starting a super pension?

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

A speech from the Prime Minister on fixing housing

“Fellow Australians, I want to address our most pressing national issue: housing. For too long, governments have tiptoed around problems from escalating prices, but for the sake of our younger generations, that stops today.”        

Taxation

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Exchange traded products

Multiple ways to win

Both active and passive investing can work, but active investment doesn’t in the way it is practised by many fund managers and passive investing doesn’t work in the way most end investors practise it. Here’s a better way.

Economy

The Future Fund may become a 'bad bank' for problem home loans

The Future Fund says it will not be paying defined benefit pensions until at least 2033 - raising as many questions as answers. This points to an increasingly uncertain future for Australia's sovereign wealth fund.

Investment strategies

Managed accounts and the future of portfolio construction

With $233 billion under management, managed accounts are evolving into diversified, transparent, and liquid investment frameworks. The rise of ETFs and private markets marks a shift in portfolio design and discipline. 

Property

Commercial property prospects are looking up

Commercial property is seeing the same supply issues as the residential market. Given the chronic undersupply and a recent pickup in demand, it bodes well for an upturn in commercial real estate prices.

Infrastructure

Private toll roads need a shake-up

Privatised toll roads in Australia help governments avoid upfront costs but often push financial risks onto taxpayers while creating monopolies and unfair toll burdens for commuters and businesses.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.