SMSF Life Insurance

If you’re thinking about setting up an insurance policy within your Self-Managed Super Fund (SMSF) because you heard buying life insurance through your super can be a more convenient and affordable, there are several things you need to consider first.

Published December 1, 2017

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What is life insurance through your SMSF?

SMSF life insurance refers to buying life insurance through your self-managed super fund. Essentially, the SMSF owns your life insurance policy, therefore, all trustees will need to jointly sign the policy owner’s declaration for any policies taken out on behalf of its members.

As a trustee, you are obligated by law to have documented proof that you have considered the appropriateness of life insurance for the fund members.

The reason life insurance must be considered for fund members is that the Federal Government Cooper Review revealed that only an estimated 13% of SMSF members had life insurance. Meaning, their loved ones might be thrown into financial turmoil should the member die suddenly.

How it works | SMSF life insurance reviews

To meet your trustee obligations to the ATO you must show that you’ve considered purchasing life insurance through your fund for the members. This will form part of your larger SMSF’s investment strategy and needs to be documented and kept for compliance.

Documented proof

The documented statement can be as simple as: “The trustee(s) have taken the need for death and disability insurance into consideration and have decided <insert decision and the reason for your decision>”

Then, list the process you followed, for example:

Paying your premiums

In order to pay your premiums, you need to ensure that you have sufficient funds in your Self-Managed Super Fund to meet your premium obligations and you need to factor in the cost of your insurance when deciding on your investment strategy.

Paying your premiums via your Superfund might be easier to manage and more affordable because premiums are generally deducted from your fund and will generally be tax deductible.

Types of insurance available in your DIY Super Fund

Generally, Super funds have 3 types of insurance available for members:

1. Life insurance

Life Insurance pays a lump sum benefit upon death or diagnosis of a terminal illness. The lump sum benefit will first be paid into your fund and then released according to your trust deed and any death benefit nominations you have made.

2. TPD (Total and Permanent Disablement) Insurance

TPD insurance in SMSF pays a lump sum benefit if you become totally and permanently disabled and are unlikely to work again.

Any Occupation TPD Cover

Any Occupation TPD cover provides a benefit if you become totally and permanently disabled and unable to work in ANY occupation. You will generally be able to access benefits with this TPD definition.

Please note: As of 1 July 2014 Own Occupation TPD is unavailable for purchase through Super.

Own Occupation TPD Cover

Provides a benefit if you become totally and permanently disabled and unable to work in your OWN occupation. However, this type of policy is no longer available through Super as it may not meet the conditions of release.

If you have an existing Own Occupation TPD policy in your Super Fund which you took out prior to July 1, 2014, you are still generally permitted to continue to hold your existing policy in your SMSF, however, it may still not meet a condition of release.

3. SMSF income protection insurance

Insurers will generally allow you to take out income protection (Salary Continuance) through your SMSF. However, a number of built-in features may not be available to you (most PDS’s will highlight this, however, some of the older ones may not). These unavailable built-in features may include the Rehabilitation Benefit, Accommodation Benefit and Premium Waiver Benefit.

4. Trauma insurance

Trauma Insurance is no longer available through your super fund as it was found to be highly unlikely that an eligible claim for a trauma claim payment would meet a condition of release.

However, the lump sum benefit could be caught up in the SMSF and would potentially not be accessible to members of the fund. Therefore, if you would like to take out trauma insurance, you will need to do so with a policy held outside of super.

Take note: Since1 July 2014, Super laws look to prohibit insurance that does not align with the condition of release, therefore much consideration and care should be taken when taking out TPD or income protection insurance so you are not be left with a situation where the claim proceeds cannot be released. This rule does not apply to insurance policies owned by the SMSF as at 30 June 2014.

Advantages of life insurance through your SMSF

There are a number of tax benefits when taking out insurance through a Self-Managed Super Fund.

Life Insurance Benefits

Any life insurance premiums paid for by your fund are fully tax-deductible to your fund.

TPD Insurance

Premiums may be fully tax-deductible to the fund, depending on the definition of TPD Insurance you have chosen.

Income Protection

Income Protection premiums are tax-deductible to your fund.

Please note that any insurance policies you take out through your Self-Managed Super Fund which are eligible for tax deductions are only able to receive deductions to the fund and not to the individual.

Insurance policy typeCharacteristicsTax deduction portion
Income protection under temporary disability condition of releaseProvides a benefit if you are unable to work because of illness or injury100% of premiums
TPD ‘any’ occupationA policy which will pay 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 health100% of premiums
TPD ‘own’ occupation
(no longer available through Super as of 1 July 2014)
A policy which will pay a benefit if the insured person is unlikely to be employed in their own specific occupation due to ill health67-80% of premiums for policies in place as at 30 June 2014; deduction depends on bundling and exclusion
(not available as of 1 July 2014)
Provides a benefit if you are diagnosed with a specific illness or injuryNo deduction available unless policy was in place as at 30 June 2014

Source: GreersSullivan CPA (March, 2017)

Disadvantages of holding insurance inside your Super

As a trustee, you are responsible for ensuring a member of the fund has met a condition of release before releasing any funds. Therefore, generally, your SMSF can only pay the insurance benefits of policies owned in your Superfund when the Member:

  1. Meets the policy definition You firstly need to meet your insurance policy’s definition of a claimable event or condition, for example how your insurance policy determines total disablement.
  2. Meet the rules of your Trust Deed
  3. Meets a condition of release as per SIS (Superannuation Industry Supervision) legislation, such as:
    • Death of a member
    • Terminal medical conditions that are likely to result in a member’s death in the next 24 months, as confirmed by two medical professionals. There are no cash restrictions on benefit payments.
    • Termination of gainful employment where, at the time of termination, the member’s preserved benefits in the fund are less than $200.
    • Permanent incapacity: Ceased gainful employment, due to ill health, as confirmed by two registered medical practitioners. There are no cash restrictions on benefit payments.
    • Temporary incapacity: Temporarily ceased work due to a physical or mental illness that does not constitute permanent incapacity. Benefit payouts are restricted to the period of incapacity and will not be paid if you are receiving sick leave benefits from your employer.
    • Severe financial hardship in which the member, who had received relevant government income support for 26 continuous weeks at the time of their SMSF application, cannot meet immediate and reasonable family living expenses. Cash payments are restricted to a single gross lump sum of up to $10,000 and only one payment per any 12-month period is permitted.
    • Compassionate grounds: When a member does not have the financial capacity to meet an expense and the Department of Human Services has provided written confirmation that the release is permitted. Payment is restricted to a single lump sum amount as determined by the Regulator.

List of disadvantages

Thinking about starting your own SMSF?

First, ask yourself whether taking insurance through your SMSF will complicate or simplify your life. Then, determine which cover you already have in place and review replacement options and additional cover options if you fall short. Ensure you indicate these investigations and any resulting decisions in your SMSF’s investment strategy.

Be sure to keep your budget in mind; consider what you can currently afford and whether you’ll still be able to afford these premium payments in 5 to 10 years’ time.

SMSF Trustee obligations

As Trustee, one of your obligations is the requirement to document any consideration you have made about holding life insurance within your fund. While you don’t legally need to hold life insurance within your SMSF, it must at least be considered.

We make it easy for you to compare policies online with our powerful comparison engine.

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Regulation 4.09 (2)(e)

The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following…(e) for a self managed superannuation fund – whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

Once you have decided you want to take out insurance cover within your SMSF, you will need to establish the level and type of cover your members require at their current stage of life.

Cover type and level of cover

When considering the level of cover you need, it is important to take into account:

Another consideration is members’ insurability which may depend on their age and individual circumstances, including:

With all these questions to consider, this might be a good time to enlist the services of an SMSF insurance specialist.

Benefits of using an SMSF insurance specialists

Whether you’re considering taking out insurance via your SMSF or already have it in place, it’s important that you regularly review the insurance requirements and its appropriateness. Therefore, it is important to engage the services of an SMSF Insurance specialist.

At Life Insurance Direct we specialise in Life Insurance of SMSF’s and can help you optimise your policy ownership structures while comparing up to 9 life insurance companies so you can be confident that your cover provides your fund members with great value.

Policy ownership structure

Once you take out insurance through your super fund, the fund becomes the policy owner. This means any benefit paid is paid to the fund. Several conditions will need to be met for you to access the benefit.

Other ways to optimise who pays for the insurance policy and who owns it, is through Flexible Policy Linking or Split Premiums (TPD and IP). For example, if you are looking to take out trauma insurance you could consider a policy that has ‘multiple policy owners’ by using Flexible Policy linking.

Flexible Policy Linking

Allows you to take out a combined policy but separate the ownership of the policies between superannuation owned (including SMSF) and Self Owned. Providing you with more benefits than would have been available if the cover was held only through super.

Split TPD Cover

Allows you to take out a combined policy but split your TPD Cover between Super or SMSF owned and Self Owned. This allows you to take out both Any Occupation TPD within Super as well as Own Occupation definition outside of Super, giving you access to both benefits.

Split Income Protection

Select insurers will allow you to split your Income Protection between fund ownership and self-ownership. This structure provides benefits from both inside and outside Super while allowing you take advantage of the savings your fund provides in paying for your premiums.

How to apply for SMSF insurance

Before you begin, it is crucial that you DO NOT CANCEL your existing life insurance policy until your new policy is in place. You do not want to get into a situation where you have cancelled your cover and are then unable to take out new cover.

Once your cover within your SMSF is in place, you can then make the decision whether or not to cancel your pre-existing cover, without compromising your protection.

If you decide to take out life insurance through your own fund, you need to be aware that any existing policies you might have cannot simply be transferred into the new fund and a new policy will need to be applied for.

It might be worth requesting the services of an SMSF insurance specialist, like Life Insurance Direct, to help you with this.

Generally, applying for a life insurance policy through your SMSF is like applying for a life insurance policy that is owned individually. However, the Self-Managed Super Fund needs to be elected as the policy owner and should be nominated as the entity paying the premiums.

How to check which insurance you already have through Super

Check your annual super statement or access your super account online if you need a reminder of which policies you currently hold within your Superfund. Make sure to also check the amount of cover you have and how much you are currently paying, as well as how your super fund calculates your insurance premiums.


  • Which insurance premiums are tax deductible to SMSF?

    Premiums for life insurance, Any Occupation TPD and Income Protection held inside your SMSF is tax deductible when you are following the obligation that goes with a compliant Self-Managed Super Fund. This is generally the main benefit of purchasing life insurance through your Super. However, the life insurance benefit will be taxed if paid to non-dependent beneficiaries, for example, your adult children.
  • Are life insurance policies tax deductible in SMSF?

    Yes, premiums paid for a life insurance policy for a member of the SMSF, where your SMSF is the policy owner, will be fully tax-deductible to the fund. However, the life insured must be a member of the fund and the fund must be compliant.
  • Is income protection insurance tax deductible in SMSF?

    Yes, income protection is tax-deductible to the SMSF if you, as the life insured, is a member of the fund, your fund is the policy owner and the SMSF is compliant. However, this tax deduction could end up being less than your marginal tax rate if the IP was held it outside of Super. Inside Super, your fund will only be able to claim a maximum deduction of 15%.

    If you split your Income Protection, both you and your fund will be able to claim the tax deduction for the portion of premiums they pay respectively.
  • Can SMSF pay for my income protection insurance?

    Yes, your SMSF can pay for your income protection insurance if the SMSF is the policy owner. However, you’ll have to make additional contributions to your SMSF to pay for your income protection premiums or you can arrange they be paid via your existing superannuation balance.
  • Can I transfer my self-owned insurance to my SMSF?

    No, the ATO has ruled that you cannot transfer a life insurance policy held outside your Super into your SMSF. Such a transfer would be in breach of subsection 66 (2A) of the Superannuation Industry (Supervision) Act 1993. Cancelling your current policy and requesting a re-issue to your Super Fund is the main method of getting eligible existing insurance into your fund.

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