TECE News - June

Welcome to this month’s technical roundup from the TECE team. This update helps keep you up to date with the latest industry news and technical developments in financial advice relating to insurance, superannuation, tax and estate planning.

With the end of the 2019/20 financial year fast approaching, many people may be wondering how much they can contribute to their superannuation to reduce tax and/or increase their superannuation savings.

The information below is an EOFY checklist that provides a summary of the key superannuation and insurance year-end planning actions that advisers should consider for clients in 2019/20. 

Did you know that if an individual becomes bankrupt, certain life insurance policies (both inside and outside of superannuation) may be protected against bankruptcy?

Section 116(1) of the Bankruptcy Act 1966 (the Act) provides a broad description of ‘property’ that is divisible amongst creditors. This includes all property that:

• belonged to, or was vested in, the client at the commencement of the bankruptcy, or
• is acquired by the client, or devolves on them, after the commencement of the bankruptcy and before the client’s discharge.

The definition of ‘property’ would normally include life insurance policies and their proceeds, however, section 116(2) of the Act specifically excludes certain assets such as from being divisible among creditors, such as:

• policies of ‘life assurance’ or endowment assurance in respect of the life of the bankrupt or the spouse or de facto partner of the bankrupt
• the proceeds of such policies received on or after the date of bankruptcy
• an interest in a regulated superannuation fund, approved deposit fund or exempt public sector superannuation scheme.

However, there is a discrepancy between the Bankruptcy Act 1966 and the Life Insurance Act 1995 as to what constitutes a policy of ‘life insurance’ as opposed to policy of ‘life assurance’.

The Bankruptcy Act does not include reference to the term ‘life insurance’. Instead, it refers to 'life assurance’, which is undefined. At common law (as expressed by the High Court in National Mutual Life Association of Australasia Ltd v Federal Commissioner of Taxation (1959)), the definition of life assurance refers to policies on the life of an insured person (ie. a pure life insurance policy) as opposed to policies covering total and permanent disability (TPD), trauma, and income protection.

Whereas the Life Insurance Act defines a policy of ‘life insurance’ to also include any TPD, trauma and income protection.

This means the exemption under the Bankruptcy Act will only protect a bankrupt person's life insurance policy (and generally any TPD or trauma policies that are riders to that life policy) from being divisible amongst the creditors of the bankrupt. Thus, in the event of bankruptcy, the policy proceeds would go to the bankrupt policy owner, a surviving joint owner or a nominated beneficiary, or to the bankrupt policy owner’s estate.

As stand-alone TPD, trauma, and income protection policies are not considered ‘life insurance’ policies at common law, these policies will not be excluded from being property divisible amongst creditors of a bankrupt. 

Q: My client has been divorced for over 10 years. His ex-wife owns a life insurance policy with AIA over his life and she continues to pay the premiums on the life insured (my client).

My client does not want the policy unless it is specifically for the benefit of his daughter, however there is no beneficiary listed on the policy. My client’s ex-wife refuses to nominate the daughter and does not want to transfer the life insurance policy to my client (as the life insured).

Does my client have any ability to remove himself as the life insured?

A: AIA’s strict legal obligation is to the policy owner first, not the insured.

As we (AIA) don’t know what all the circumstances might be between the ex-spouses, we cannot amend, change or vary the policy without the policy owner’s agreement.

Thus, the ex-wife as the policy owner does not have to cancel the policy or alter the beneficiary to the daughter as is being requested in this case.

Do you have a technical question about a financial advice strategy or need to find technical resource material? Don’t hesitate to email us at tece@aia.com

Kind regards,
The AIA Technical and Education Centre of Excellence (TECE) Team