Insurance and Your SMSF: A Crucial Consideration

While the focus of a Self-Managed Super Fund (SMSF) is often on investment growth, it’s equally important to consider how you will protect your members and the fund’s assets from unforeseen events. Insurance is a crucial component of a robust SMSF strategy, providing a financial safety net when it’s needed most.

 

Your Obligations as an SMSF Trustee

As an SMSF trustee, you have a legal obligation to consider the insurance needs of each member of the fund. This doesn’t mean you are required to take out insurance, but you must be able to demonstrate that you have reviewed and considered the appropriateness of holding insurance for each member. This consideration should be documented in your fund’s investment strategy and reviewed at least annually.

 

Types of Insurance You Can Hold in Your SMSF

There are three main types of insurance that can be held within an SMSF:

  • Life Insurance: Provides a lump sum payment in the event of a member’s death or diagnosis of a terminal illness.
  • Total and Permanent Disability (TPD) Insurance: Provides a lump sum payment if a member becomes totally and permanently disabled and is unable to work again.
  • Income Protection Insurance: Provides a regular income stream for a specified period if a member is temporarily unable to work due to illness or injury.

 

The Benefits of Holding Insurance in Your SMSF

There are several advantages to holding insurance within your SMSF:

  • Tax-Effective Premiums: Insurance premiums are generally tax-deductible to the SMSF, which can make it a more cost-effective way to obtain cover compared to paying for it with after-tax dollars.
  • Cash Flow Management: Paying premiums from your superannuation savings rather than your personal bank account can help with your day-to-day cash flow.
  • Protecting Your Retirement Savings: In the event of a claim, the insurance proceeds are paid to the SMSF, which can help to protect the retirement savings of the other members.

 

Important Considerations

While there are clear benefits, there are also some important considerations to keep in mind:

  • Conditions of Release: For a benefit to be paid from an insurance policy held within an SMSF, the member must meet a “condition of release” under superannuation law.
  • ‘Any Occupation’ vs ‘Own Occupation’ TPD: TPD insurance held within superannuation generally has an ‘any occupation’ definition, which is a stricter definition than the ‘own occupation’ definition often available outside of super.
  • Impact on Retirement Savings: Paying insurance premiums from your SMSF will reduce your retirement savings. It’s important to balance the need for protection with your retirement goals.

 

Seeking Professional Advice

Determining the appropriate level and type of insurance for each member of your SMSF can be complex. It’s highly recommended to seek advice from a qualified financial advisor who specialises in insurance. They can help you to assess your needs, compare different policies, and ensure that your insurance strategy is aligned with your overall retirement plan.