Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 155

The vital role of insurance in super for disability care

This is a sad and true story of a young man – let’s call him Mikey – who in July 2015 at the age of 31 suffered devastating injuries whilst participating in the sport he loves, mountain biking. Mikey is now a tetraplegic, meaning his injury affects all four limbs, and with limited neurological recovery expected, he will always have a high dependency for care.

He has been in hospital in the spinal unit for many, many months and soon it will be time to go home. He is lucky to have a loving, caring family and his parents have decided to provide his long-term care in their home. Even his sister has moved back home to help.

Importance of risk insurance

Before his accident, Mikey worked as a roofing contractor, and his Super Guarantee contributions were being made to a retail superannuation fund. Mikey had saved little in his super so far, and had no other savings or assets to speak of. As luck would have it, the fund came with death and Total and Permanent Disability (TPD) cover and Mikey is now entitled to a payment of around $493,000.

Mikey’s father came in to seek financial advice on what to do with this sum. Of course, the family home needs alterations to accommodate Mikey’s care including a new bathroom off his bedroom, but Mum and Dad are choosing to fund these alterations themselves rather than pay for them out of the insurance payment.

They wish to set aside the TPD payout as a long-term investment for Mikey’s benefit in future years. They were in the process of understanding Mikey’s entitlements under the National Disability Insurance Scheme (NDIS) which is rolling out in their area on 1 July 2016. They were keen for Mikey to qualify for the Disability Support Pension (DSP) so that they did not have to draw on the TPD payment for his living expenses.

A financial plan for a person with a disability

What should they do with the $493,000 so that it can be invested for the long term, but accessible if needed without affecting the DSP which of course is means tested? Investing the money in Mikey’s own name means it will be subject to the Income and Assets test and cut into his Government benefits.

A Special Disability Trust (SDT) is a trust established to pay for any disability care, accommodation, medical costs and other needs of the qualifying beneficiary during their lifetime. It comes with social security benefits in that the balance up to $636,750 is exempt from the Assets Test, so it would meet the requirement to maximise Mikey’s DSP.

However, there is one major hurdle. SDTs are specifically intended for succession planning by parents and immediate family members for the current and future care and accommodation needs of a person with a severe disability or medical condition. As such, only immediate family members can contribute to it and Mikey is not able to contribute himself as the beneficiary.

No SDT for Mikey. If in future Mum and Dad wanted to set one up for him and gift their own assets to it, it can be considered down the track.

The solution is actually remarkably simple: keep it in super in the accumulation phase, but roll it to a new fund. The payment from the new fund will be classified as a ‘disability superannuation benefit’. A formula is applied to the payment to calculate a tax-free component, and in this case it will be a significant amount, around $479,000.

The remaining $14,000 is a ‘taxable’ component, taxed at 21.5% if and when he withdraws it from the superannuation system as a lump sum.

For more information on how disability superannuation benefits are taxed refer to the ATO site here.

As Mikey has met the ‘total and permanent incapacity’ condition of release, he can access the money at any time. Lump sums will be withdrawn in proportion to the tax-free and taxable components, and taxed accordingly.

Best of all, as he has left it in accumulation phase (as opposed to starting an income stream), and he is under his age pension age of 70, it is exempt from the Income and Assets test and he qualifies for the full rate Disability Support Pension which is tax-free.

Super is, in fact, a very tax-effective and flexible vehicle to hold money for those who are young and suffer permanent incapacity. There’s no need to go fiddling around with complex trusts. Although it is worth noting that the recent super announcements in the Federal Budget – namely the $500,000 lifetime limit on non-concessional contributions – puts the brakes on being able to contribute large compensation payouts to super.

In Mikey’s case, once he moves home to his parent’s house, they will meet the interdependent relationship definition. This means that they are treated as each other’s dependants for both tax and superannuation purposes. Mikey will do a non-lapsing binding nomination to his parents, and if he predeceases them, the money passes to them tax-free. As he has no other assets, this negates the need for him to do a will.

The ripple effect of this terrible accident runs wide, and has changed the lives in this entire family. Mikey’s Dad needs to cut down his working hours from full time to part time to care for Mikey. He is in a defined benefit super fund, with the end benefit paid being based on a formula relying on a multiple (including part-time adjustments) and Final Average Salary. Cutting down his hours is going to cost him in terms of his own retirement benefit.

But imagine the position Mikey would be in if a) he didn’t have such a loving, supportive family and b) he didn’t have the insurance cover in his super fund. It’s a strong argument for compulsory insurance cover in super for the young.

 

Alex Denham is a Financial Services Consultant and she is also freelance writer. This article is general information and does not consider the personal circumstances of any individual and professional advice should be obtained before taking any action.

 

RELATED ARTICLES

The insurance essentials

Understanding disability insurance in super

Ensure your children are insured

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

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.