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SMSF trustees must consider whether to take out appropriate insurance cover for each member of their fund as part of preparing their investment strategy.
It’s a legal requirement for all super funds (including SMSFs) to prepare a documented investment strategy during the SMSF’s set-up process. This strategy (including any insurance coverage) must be reviewed regularly by fund trustees to ensure that it continues to reflect member needs and circumstances as they change over time. Trustee compliance with their fund’s investment strategy is one of the facets that is checked as part of their annual audit by a licensed SMSF auditor.
The Super System Review conducted by the federal government in 2015 found that less than 13% of SMSFs have insurance coverage for their members. It’s important to understand though that this doesn’t necessarily make the other 87% of funds non-compliant with super legislation.
The government report actually found that SMSF members were more likely than those in other superannuation sectors to hold insurance outside of their SMSF. This finding led to the conclusion that there SMSFs should not be required to provide a default level of insurance coverage for their members, as many public sector funds do.
However, SMSF trustees must still thoroughly consider each member’s financial situation to determine if they have an appropriate level of insurance cover. Important considerations include:
- their current level of debt,
- whether they have any dependants, and if so, how those dependants could be provided for it the SMSF member died or became unable to work for any reason.
What types of insurance cover are SMSFs allowed to provide?
SMSFs are allowed to provide any type of insurance cover that meets one of the following superannuation conditions of release:
- death (life insurance),
- permanent incapacity which causes the fund member to permanently cease working (total and permanent disability (or disablement) insurance – also known as TPD insurance),
- temporary incapacity which causes the fund member to temporarily cease working (income protection insurance), and
- the diagnosis of a terminal medical condition (by two medical professionals) that is likely to result in the member’s death within two years. Terminal illness benefits are generally an option available with life insurance policies.
Each of the above conditions of release allows a fund member to access their super funds regardless of whether or not they have reached their preservation age.
The benefits of purchasing insurance through an SMSF
The main benefits of purchasing member insurance through an SMSF are:
- The premiums for all of the allowable forms of SMSF insurance are tax-deductible from the fund’s earnings in its annual tax return, provided that the SMSF is listed as the policy owner and the SMSF member is the insured person. On the other hand, life and total and permanent disablement premiums are not tax-deductible if an SMSF member chooses to have this coverage outside of their fund. Income protection insurance is tax-deductible for a member who takes this coverage outside of their SMSF, provided that they have no cover within their fund.
- The premiums are paid by the fund, so a fund member’s personal cash flow isn’t affected.
- The insurance cover can usually be tailored to the member’s individual circumstances, unlike the “blanket” insurance cover that is generally provided for members of large public super funds. This tailoring can help to ensure that an SMSF fund member isn’t underinsured.
SMSFs may pay higher premiums than larger public funds because the larger funds can often negotiate bulk purchase premium discounts with insurance providers.
However, some insurance companies offer policies specifically for SMSFs that can allow them to combine and benefit from lower “group insurance” rates. SMSF premiums can therefore potentially be cheaper than (or at the very least comparable to) the premiums that individual members will often pay when dealing directly with insurance companies.
Can I transfer my personal life insurance policy to my SMSF?
Yes. However, it’s important to remember that it’s a legal requirement for SMSFs to keep its assets separate from its member’s personal assets. Therefore, when transferring your personal life insurance policy to your SMSF, the ownership of the policy must be transferred from your name into the name of your SMSF. You remain as the life insured.
You may be charged a fee by your insurance provider for doing this ownership transfer. However, as outlined earlier in this article, you’ll gain the benefit of your SMSF being able to claim your premiums as a tax deduction.
What other types of insurance cover can SMSFs purchase?
Beyond life insurance, total and permanent disability insurance and income protection insurance, there are other types of insurance cover that SMSFs can purchase, including:
- Property insurance. If your SMSF has residential or commercial property in its portfolio of investment assets, it’s crucial to have adequate property insurance in place. This helps to safeguard the value of the property against damage or destruction.
- Trustee insurance. This type of coverage can help to protect an SMSF trustee’s personal assets from legal liability in the event of any serious breaches of their legal obligations.
It’s important to note that it is no longer possible for an SMSF to purchase trauma insurance (coverage for a person suffering a stroke or a heart attack) for it’s members, although this is allowed if the policy was taken out prior to 1 July 2014. The rules were changed because trauma insurance policies usually pay a lump sum benefit regardless of whether or not the person who has suffered the trauma actually ceases work or becomes permanently disabled. Trauma insurance therefore doesn’t satisfy a super condition of release.
It’s also important to note that SMSFs cannot purchase insurance policies for cover such as health insurance because it doesn’t satisfy the sole purpose test. The Australian Taxation Office (ATO) requires super funds to be maintained for the sole purpose of providing retirement benefits to their members (or to their dependants if any of their fund members die before retiring).
The bottom line
SMSFs trustees are legally obliged to consider whether to take out insurance cover for each member of their fund as part of preparing their fund’s investment strategy. However, this doesn’t mean that SMSFs must obtain insurance cover for their members. Members may already have an appropriate level of cover outside the fund, though there are some specific benefits that SMSF insurance coverage can provide.
The information contained in this article is general in nature. It’s best to seek independent professional advice to determine whether your SMSF should take out insurance cover that’s appropriate for the specific needs and circumstances of your members.