Insurance, life insurance in particular, is the norm in most super funds. It’s included and paid for automatically, whether it suits the individual concerned or not.
However, when a member exits from a retail, industry or other externally managed fund into an SMSF, insurance is a consideration that often falls by the wayside. Trustees need to consider insurance for the members in their fund – this is a legal requirement and is an essential part of the fund’s investment strategy. Additionally, this consideration needs to be reviewed by the trustees on a regular basis. SMSFs are largely underinsured, with only an estimated 13% of SMSF members thought to have any life insurance cover.
Does my SMSF need life insurance for its members?
The super regulations do not stipulate that SMSFs need life insurance for its members, rather that insurance should have been at least considered with regard to the personal circumstances of the members. If a member is already adequately insured outside of their SMSF then insurance may not be required.
Types of insurance
Super funds can provide fund members with three types of insurance cover:
- Life insurance or death benefit cover
- Total and permanent disability (TPD, or invalidity) insurance
- Income protection insurance
The types of insurances your super fund can buy will change from 1 July 2014. From this date it won’t be possible to purchase ‘own occupation’ disability insurance or new trauma policies. Own occupation disablement insurance will normally pay a benefit if you can’t perform your current job. This doesn’t mean, however, that you’re permanently disabled under the super laws – you may still actually be able to work even if the new job isn’t the same as your original one. Because of this, it means that ‘own occupation’ insurance benefit payments can be trapped in a super fund – you would not meet a condition of release. A condition of release would generally be turning 65, death, temporary or permanent disablement, or a terminal medical condition.
Trauma insurance policies pay out when you suffer one of a defined range of medical problems such as heart attacks, strokes or brain tumours. Again, while you may qualify to benefit from a trauma policy, the proceeds may be trapped in the fund as a condition of release has not been met, so these policies are no longer available for SMSFs.
What about self insurance?
An option previously available to trustees of SMSFs is where the trustees reserve a portion of the fund that would be available to the members in the event of an accident. Its an option often used by trustees who find that traditional life insurance options aren’t available to them due to age or other illnesses. However, this option is no longer available from 1 July 2013.
Can a policy owned by a member be transferred to the super fund?
No – the SMSF cannot acquire an insurance policy from a member. The policy would need to be terminated and reissued with the SMSF as the policy owner. If the insurer is not prepared to create a new policy on the same terms to the SMSF, reissuing the policy may not be worthwhile – new medical tests may need to be taken and this could lead to higher premiums.
Tax deductibility
Life insurance premiums are deductible within super, not including trauma and ‘own occupation’ components of TPD. Life insurance is not deductible in an individual’s name. Income protection insurance is deductible both inside and outside of super, although there is often a greater deduction benefit outside of super as the policy holder would have immediate access and individuals are often taxed at higher rates than super funds and therefore benefit from a larger tax deduction.
Other kinds of insurance
From 1 July 2011, it is a requirement for those that hold artwork and collectables as investments in their fund to have these assets insured through a policy in the name of the fund.
If you have property in your SMSF, particularly if it is part of a limited-recourse borrowing arrangement, it would also be a good idea to have an insurance policy in place for the property.
As you can see, there are a few things to note about insurance that may affect you, your super and your SMSF.
