Insurance for Superannuation and SMSFs

Insurance for Superannuation and SMSFs

Insurance is an important consideration particularly within the superannuation environment. There are several different types of insurance policies that you can purchase via your superannuation, including self-managed super funds.

   1. Life insurance or death benefit cover

   2. Total and permanent disability (TPD, or invalidity) insurance

   3. Income protection insurance

Life Insurance

Life insurance is particularly important in regards to SMSFs because the law actually requires all SMSF trustees to consider life insurance as part of their investment strategy. Its not compulsory to have a policy, it simply needs to be considered. If you feel that it isn’t required for you then that’s fine – you may already be covered outside of the SMSF or do not have any dependents/liabilities.

While life insurance is automatically provided for industry and retail funds, trustees of SMSFs tend to forget about having insurance in their own funds. SMSFs are largely under-insured, with only an estimated 13% of SMSF members thought to have any life insurance cover.  

Total and Permanent Disability (TPD)

There are two types of Total and Permanent Disability Insurance.

“Any Occupation” TPD provides coverage where you can longer work in any occupation for which you are suited due to training experience or education due to sickness or injury. This is allowed within the super fund, however the policy will also need to ensure that it meets the super legal definition of Permanent Incapacity and two medical practitioners will need to verify that the member can no longer work before the benefit can be paid.

“Own Occupation” TPD provides coverage when the member can no longer work in their current position, even if they’re still able to work in different one for which they are trained. An example may be where a surgeon permanently injures their hand, however they can still operate as a general practitioner. Obviously this benefit is easier to access, however you cannot hold this kind of policy in your super fund.

The types of insurances your super fund can buy changed 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.    

Income Protection

Income protection provides members with a monthly insurance payment if they are unable to work temporarily due to sickness or accident. From 1 July 2014, only standard Income Protection policies can be held with an SMSF and they must comply with the conditions for temporarily disability payments under superannuation legislation.

Additionally, unlike life insurance and TPD, income protection is a claimable tax deduction for most individuals, and therefore the tax benefit of having the policy held by the super fund is generally lower than simply holding it outside of super.

Other kinds of insurance

It is now 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. For artwork purchased before 1 July 2011, trustees have until 1 July 2016 to have these policies in place.

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. 

Why should you consider having an insurance policy in your SMSF?

1. It provides insurance protection. This is a big consideration particularly where you have dependents or liabilities. Insurance provides a lump sum to any dependents or surviving family to assist them in the event of death, total and permanent disability or in the event that you can longer work.

2. Tax deductible in super. A tax deduction can be claimed for the premiums paid for policies held within a super fund. This deduction isn’t available for policies held outside of super (e.g. in a personal capacity).

3. Cash flow benefits - you can use the funds in super to pay for the premiums rather than using your own cash.

That being said, here are a few reasons why you shouldn’t have a life insurance policy in your SMSF:

1. Retail and industry funds have capability to access group rates so that their member’s premiums are cheaper – premiums for SMSF members tend to be higher. If you have access to a policy that is cheaper (via another fund), you may prefer to keep that instead.

2. It may not be viable to transfer any existing policies to the super fund as the member may need to pass medical tests or have pre-existing conditions that can no longer be covered.

3. Tax might be payable on the payout of insurance benefits - this depends upon the status of the beneficiary

4. Paying insurance policies from super benefits reduces your available retirement balance.

5. Restrictions on the features of the policies that you can have – if you need more features and coverage, some of these are not allowed within a policy owned by a super fund.

TIP – if you do decide to purchase an insurance policy via your super fund, make sure that the ownership is in the name of the trustee as trustee for the fund!

Don’t have an SMSF? I would still encourage you to look at your circumstances to see whether you could benefit. Ask yourself the following:

-          Are you already covered via a retail or industry fund?

-          If so, do you know how much you’re paying for insurance?

-          Do you know what you’re covered for?

-          Do you have dependents or large liabilities? What happens to these if you have an accident and can no longer work, or if you die?

Insurance may be a worthwhile expense for your peace of mind, so don't forget to consider it.

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