Masterclass SMSF – Insurance in super – What is allowed and what is not – and how you access it

Masterclass SMSF – Insurance in super – what is allowed and what is not – and how you access it
SMSF – Insurance in super – what is allowed and what is not – and how you access it

Part of the Trustee compliance responsibilities include consideration of holding insurance in SMSF but need to know what is possible and what is not (section 4.09 (2(e)) Superannuation Industry (Supervision) Regulations 1994). However trustees are not compelled to take it out, but provide evidence it was considered.

There are four differing types of insurance that Trustees need to consider (one only applies from old rules).

1. Income Protection (Salary Continuance) Insurance
This provides a benefit if you’re unable to work due to an illness or injury and cannot meet ongoing financial commitments. The premiums are tax deductible to both the SMSF or individual. If the SMSF receives insurance proceeds the member will need to have temporarily ceased work due to physical or mental ill health, to be eligible to receive the benefit in the form of an income stream from the super fund and proof will apply (ie. a condition of release is required). So getting the cover can be limited. Consider if being directly payable to you is more beneficial – and seek advice.
2. Life Insurance
Life insurance provides a lump sum in the event of death to dependents and can help increase the amount payable to cover for loss of earnings and ongoing financial commitments. The premiums are tax deductible to the SMSF, but NOT to an individual. Life insurance is commonly provided together with Total and Permanent Disability (TPD) insurance.
3. Total and Permanent Disability (TPD) Insurance
Total and Permanent Disability (TPD) insurance provides a benefit in the event of becoming totally and permanently disabled.
The premiums are tax deductible to the SMSF, but not to an individual. However, the extent of the premium’s deductibility for the SMSF depends on whether the TPD insurance relates to ‘any occupation’ (From 1 July 2014, the only definition that will be permitted will be the ‘any occupation’ definition, (meaning the ‘own occupation’ definition of TPD will be prohibited from any new policies after July 1 2014) or ‘own occupation’ (which are grandfathered, can remain, if set up before 1 July 2014).
Any occupation’ pays a benefit if the insured person is unable to be employed in any occupation for which they are reasonably qualified, educated or experienced, due to ill health. If the policy is based on ‘any occupation’, then the premium remains 100% tax deductible.
‘Own occupation’ (pre-2014) is a policy which will pay a benefit if the insured person is unlikely to be employed in their own specific occupation due to ill health. If the policy is based on ‘own occupation’, 67% of the premium is tax deductible. Where a policy bundles TPD ‘own occupation’ with life insurance, the premium is 80% tax deductable to the SMSF.
Typically ‘any occupation’ policies often require a superannuation conditions of release so access to any benefit payment is often not an issue.
4. Trauma Insurance
Trauma insurance is no-longer available in super and SMSF since 1 July 2014, but policies purchased before 2014 are still valid. SIS regulation 4.07D states that since 1 July 2014, a trustee of a regulated super fund must not provide an insured benefit in relation to a fund member unless the insured event is a condition of release specified in the following items of Schedule 1 of the SIS regulations:

  • Death (item 102)
  • Terminal medical condition (item 102A)
  • Permanent incapacity (item 103). Note that ‘permanent incapacity’ definition is a stricter definition than older insurance policies covering total and permanent disability.
  • Temporary incapacity (item 109)

The advantages of Insurance in the SMSF

  • Contributions into the fund can be used to pay the insurance premiums;
  • Trustees can customise their insurance to suit their specific needs;
  • Assists with cash flow outside of super, personal living costs;
  • Net cost saving on premiums in some cases

The disadvantages of Insurance in the SMSF

  • Sometimes more expensive due to missing wholesale cost savings which commercial funds can access;
  • Members may need to qualify for insurance (via medical tests etc) which they were not subject to in a retail or industry fund.

For an overview – see ATO site and Money Smart ASIC site.

Want to learn more, know the options and what we need to retire on, the super system in Australia and what is self-managed super? To get the answers, see our FREE slides Super & SMSF for Business owners.

Call for FREE education, or to speak to an advisor about your specific situation. SuperBenefit works with SMSF trustees to CONNECT them with the advisors they need. A call is Free. No obligation. 0407 361 596, Paul


About SuperBenefitnews

Self-Managed Superannuation Service Providers in Australia. SuperBenefit provides a wholistic SMSF assistance, education and administration service continuum - 1. “assistance” is help of whatsoever nature where our overall SMSF experience and knowledge enables us to provide assistance/help without any legal (or “license”) limitations. 2. “education” involves providing knowledge through teaching, coaching and mentoring about all matters SMSF, including (but not limited to) investment issues such as equities and property, 3. “administration” encompasses all admin aspects of legally required SMSF trustee and member record keeping including (but not limited to) audit and ATO matters. In keeping with our key point that SuperBenefit does not provide Financial Advice, where issues arise from 1, 2, and/or 3 above Indicate a need for a legally authorized provider (such as a Financial Adviser) and the client does not have their own service provider, the client can utilize SuperBenefit’s ‘Connect Assist’ … SuperBenefit, in itself, does not provide Financial Advice, but it does provide the wherewithal for great SMSF service. WE do not provide Financial Advice or any other service that requires a legally authorized provider. However, where such advice or service is required we have our ‘Connect Assist’, a SuperBenefit resource we use to connect clients to a Licensed Advisor or other legally authorised service provider. Call us 0407 361 596, no obligation FREE Connection call to see how we can help you!
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