C21/2000 ASSESSMENT OF CONVENTIONAL LIFE INSURANCE POLICIES: Clarification of Policy & Legislation

Purpose

The purpose of this departmental instruction is to provide policy information and procedural guidelines relating to the income assessment of conventional life insurance policies.

Background

Conventional life insurance policies include a commitment by the life office to carry a significant insurance risk by paying a specified minimum benefit to the customer in the event of a particular incident.  An example is a whole of life policy.  Such policies differ from policies that do not feature a significant risk, which are classified as managed investments.

During the course of the CLIK project it became evident that there was a discrepancy between the Department of Family and Community Services (FaCS) and the Department of Veterans' Affairs (DVA) policy in relation to the assessment of conventional life insurance policies.  While DVA did not assess bonuses as income either during the term of the policy or on maturity, FaCS assessed bonuses as income for 12 months upon maturity.

Investigation revealed that the FaCS policy changed on 21 July 1997.  The FaCS policy clarification occurred because discounting such amounts was inconsistent with the intention of the Social Security Act 1991 (SSA).  FaCS also recognised that ignoring such bonuses was inequitable compared with the treatment of other products.

Bonus

A bonus is any amount the policy beneficiary is entitled to receive above the cost of the policy purchase price including any premiums paid.  Bonuses are all profits made on life insurance products.

Withdrawal

Withdrawal includes both surrender and maturity.  Profit is assessable as soon as the beneficiary has legal entitlement to access it.  All income is assessed at this time, irrespective of any amounts, profit or principle, left in the policy after this date.

Legislation

When a conventional life insurance policy is withdrawn, FaCS assess the capital gain received under section 1073 of the SSA.  The Veterans' Entitlements Act 1986 equivalent to this section is 46A  Certain amounts taken to be received over 12 months:

If a person receives, whether before or after the commencement of this section, an amount that:

1. is not income within the meaning of Division 3 or 4 of this Part; and
2. is not:

1. income in the form of periodic payments; or
2. ordinary income from remunerative work undertaken by the   person; or
3. an exempt lump sum;

the person is, for the purposes of this Act, taken to receive one fifty-second of that amount as ordinary income of the person during each week in the 12 months commencing on the day on which the person becomes entitled to receive that amount.

This section is also applied in situations such as life insurance policy deeming, gifting, trading and borrowing.  Questions relating to these issues can be located on the FaCS site: www.fahcsia.gov.au/internet/facsinternet.nsf/b919…

New DVA Policy

The FaCS policy relating to conventional life insurance policies is regarded as legally correct.  To ensure consistency and equity DVA policy will be aligned to the FaCS policy.  Bonuses received and withdrawals made will in future be assessed under section 46A.  The 12 months will start on the day on which the person made the withdrawal or became entitled to the bonus.  This includes situations where the person received the withdrawal/bonus within a 12 month period before claiming income support pension.

Example:  A veteran becomes eligible to receive a bonus on 1 January 2000 and claims an income support pension on 1 October 2000.  The eligible amount will be counted as income for a period of 12 months starting 1 January 2000.  For the purposes of the pension assessment the bonus amount will only be held from 1 October 2000 through to 1 January 2001 – a period of 3 months.

Policy guidelines in CLIK will be amended to reflect the revised policy.

Effective date of new policy

The change to DVA policy will take effect from the date of this instruction.  All future cases arising will be assessed in accordance with this instruction.  It should be noted that where a bonus or withdrawal has previously been assessed under the old policy, the new policy will not be applied retrospectively.

Calculating profit

Profit is classified as the total amount received upon the surrender or maturity of the policy, minus the original purchase price and any premiums paid.

Example:  A veteran purchased a policy for $10,000 then made premium payments to the value of $5,000 over the life of the policy.  So the total amount paid for the policy is $15,000.  On 12 September 2000 the veteran becomes eligible to receive $20,000.  $20,000 - $15,000 = $5,000.  This $5,000 is regarded as profit and is therefore counted as income for a 12 month period starting from the date of eligibility, which is in this case, 12 September 2000.

Recording amounts as profit

Profit is not to be calculated using the spreadsheet for Superannuation Managed Investments.  The calculation to find the amount to be recorded is detailed above.  This profit is to be recorded under 'other income' in PIPS for a period of 12 months.  A review then needs to be established, as outlined below.

Setting a review

A review date should be set in the Veterans' Information Enquiry Window (VIEW) triggering an automatic reminder for a specified period.  This is accessed through the 'Client Activity' tab.  Select 'Review'.  Set a date for review that corresponds with the expiry of the twelve month period.

Note: VIEW review is being expanded to enhance the review process.  At this stage the expansion is expected to occur on 17 July 2000.

Administering a review

When a reminder for review comes up after the twelve month period the officer responsible for the case must go into PIPS and remove the amount from the 'other income' screen.  Failure to do this would result in a veteran receiving less than their full entitlement under the Act.

Contact Officer

Please refer any questions with respect to this instruction to Daniel Caldwell on (02) 6289 6403.