In 2010 the Australian government released the Cooper Review into Superannuation.
One of its surprising findings was that only 13% of people with self-managed super funds held any form of life insurance. The latest figures from the Australian Taxation Bureau suggest there are currently over 475,000 SMSF’s with an average of two members. These statistics mean that amongst more than 900,000 people participating in their own SMSF, only 120,000 hold life insurance. Now, this would not be especially eye catching if it were not for the fact that there are significant savings and taxation advantages to having life insurance within a SMSF.
However, in with these advantages there are certain compliance obligations trustees of SMSF’s need to be aware of. In 2012 the federal government introduced new strong super obligations. Notable amongst these were that: “Trustees must regularly review the investment strategy of the fund.” And also make sure that: “This strategy adequately reflects changes to circumstances affecting the fund and its member/members.”
Why are these criteria important in regards life insurance? Well, because part of the governments mandate was that the investment strategy of a SMSF now has to include consideration as to the appropriateness of life insurance for fund members.
Let’s now take a look at the specific compliance obligations.
The overall investment strategy of the SMFS needs to be documented, a record kept for compliance, and this needs to include life insurance considerations. But this doesn’t in any way have to be an onerous or detailed task. At least twice a year, as part of a meetings minutes, a trustee just needs to record the process taken in considering life insurance and the reasons behind any decisions taken.
Now in stating this, trustees are not required by law to take out life insurance policies for members, but they do need to at least show that they have considered the appropriateness of this action. And not just life insurance should be included in this equation, also TPD (Total and Permanent Disability) as well as income protection.
So, let’s look at the types of events you can insure yourself against through a SMSF. There’s death, terminal medical conditions, permanent incapacity and temporary incapacity. And as mentioned earlier, the policies you might purchase are: death cover, any occupation total and permanent disability (TPD), as well as standard income protection policies.
Typically however, you cannot purchase comprehensive income protection policies, own occupation TPD, or trauma insurance (unless it is a continuation of benefits for a member that existed prior to 1 July 2014).
This selection of included or excluded insurance products is not solely arbitrary, but designed to adhere to specific conditions governing the release of payouts to SMSF’s. These conditions protect members and make sure that payouts from excluded insurance products do not remain trapped within a fund.
Then again, the advantages of having insurance running through your SMSF are that you can service the premium payments from the superannuation balance held in the fund. Additionally, since your super balance is an accumulation of pre-tax funds, you are also paying your premiums with money that has not yet been taxed. Also, typically income protection policies pay out approximately 75% of lost income, while if purchased through your SMSF, adhering to the correct conditions, they can replace 100% of lost income.
But when considering whether to buy insurance through you SMSF or not you need to consider every factor, including some disadvantages. You will be looking at a narrower range of products, you will be eating into your super balance, and there is a cap on how much extra pre-tax income you can put into a fund per year to try and replace funds lost through premium payments.
As you can see there’s a bit to consider. If you feel you would like more information around insurance and how it relates to your self-managed super fund, please feel free to contact our team here at SMSF Insurance Partners. Our representatives are available on (07) 30640413, or please use the Contact Us section of our website.
