SMSF Life Insurance Explained
Our Insurance Partners
-
-
-
-
-
-
-
-
-
How Does SMSF Life Insurance Work?
Typically, if you buy life cover through your SMSF, the fund owns the policy. Trustees have a legal obligation to consider all life insurance requirements of the members before putting any coverage in place. If a claim is made on life insurance inside super, the benefit is generally paid to the super.
| Who is the Policy Owner? | The SMSF (All Trustees) |
|---|---|
| Who is insured? | The SMSF Members |
| Who pays the premium? | The SMSF (All Trustees) – Take note: Generally, a credit card cannot be used to pay for a policy if it is owned by an SMSF |
| Which cover types are available? | Life Insurance: Generally pays out a lump sum benefit if you pass away or are diagnosed with a terminal illness. Life cover inside super will usually end when you turn 70 years old. |
| Total and Permanent Disability (TPD) Insurance: Typically, you will only be able to purchase Any Occupation TPD in an SMSF. This type of cover pays out a benefit if you are permanently unable to work in any occupation for which you are reasonably suited to by way of training, education or experience. TPD cover held inside of super will generally end when you turn 65 years old. | |
| Income Protection: Generally pays out a benefit which replaces a percentage of your income if you are unable to work due to illness or injury for the duration of the waiting period defined in your PDS. | |
| How are benefits paid out? | If you make a claim on an SMSF life insurance policy, the benefit is generally paid out to the fund. However, you will generally need to meet both the insurer’s policy terms and conditions and a condition of release under the Superannuation Industry Supervision (SIS) legislation. For example, retirement, the transition to retirement arrangements (TTRs), permanent or temporary incapacity, and death. |
| Who manages the cover? | The SMSF (All Trustees) – As the trustee of an SMSF, you have several important responsibilities; these include: · Detailed record-keeping of financial transactions. · Ensuring compliance with ATO regulations, including filing annual returns and meeting audit requirements. · You’ll be required to develop and implement an investment strategy. · Keeping documented statements reflecting the decision-making process when purchasing life insurance. · Ensuring that there are sufficient funds in the SMSF to meet premium obligations. |
What Types of Insurance Can an SMSF Hold?
When you are considering cover through your SMSF, the following options are typically available to you:
- Life Insurance
- Any Occupation Total and Permanent Disability Cover
- Income protection
However, SMSFs have not been permitted to hold trauma insurance since July 2014. If you require trauma cover, consider taking out a standalone policy or a superlinked policy where the trauma insurance portion is owned personally. You typically also won’t be able to apply for Own Occupation TPD cover inside super.
What Are the Requirements for Holding Life Insurance Through an SMSF?
If you are a trustee of an SMSF, you are required under legislation and trust law to meet certain obligations. These include:
- Consider and document each fund member’s insurance requirements.
- Ensure that you have developed and implemented an investment strategy aligned with your fund objectives.
- Keep documented proof of decisions, processes, types of cover assessed, variables taken into consideration ( for example, outstanding debts and dependent requirements)
- Keep enough funds available in the fund to cover insurance premiums. Typically, when premiums are paid directly from the fund, then premiums are tax-deductible to the fund.
Failing to comply with these requirements could result in penalties or directives for the fund’s trustees.
Pros and Cons of SMSF Life Insurance
When you hold insurance inside super, there are a few important things to consider before you buy cover. Because premiums are paid directly from the balance of your super, you will have less money when you retire. You must also meet additional conditions before you can receive any money. Understanding the benefits and drawbacks of SMSF life insurance can help you choose the right cover to suit your needs.
| Advantages | Disadvantages |
|---|---|
| You won’t have any out-of-pocket costs as premiums are paid from your SMSF’s funds. | You will have less money when you retire because the insurance premiums lower your Super balance. |
| Premiums paid are generally tax-deductible to the fund. Premiums for Life Insurance, Total and Permanent Disability Cover, and Income protection may be fully tax-deductible to your fund at 15% | You must meet the policy terms and conditions nd SIS legislation conditions of release (such as death, permanent incapacity, or retirement) before you’ll be able to access any benefits. |
| X | If the benefit is paid out to a beneficiary who is not financially dependent (for example, your adult children), it will be taxed. |
| X | You generally won’t have access to additional features and benefits like the Funeral Advancement Benefit or Free Child Cover |
Is SMSF Life Insurance Tax Deductible?
Yes, generally life insurance premiums paid from your super are tax-deductible to the fund at 15%. TPD insurance premiums and income protection premiums are typically also deductible to the fund at 15%, depending on your personal circumstances. Because the fund pays the premiums, members don’t claim the deduction personally. It’s important to note that tax treatment of each insurance type varies; it’s generally best to consult your accountant or a tax practitioner to learn what applies to your circumstances.
Benefits paid from income protection inside an SMSF must meet the SIS temporary incapacity condition of release before you’ll receive any money. It’s also important to note that income protection benefits held in an SMSF are taxed differently to personally held income protection. It’s typically best to consult your accountant or a tax practitioner to see how it applies to your circumstances.
How Can SMSF Life Insurance Affect Your Retirement Savings?
Before you buy SMSF life insurance, it’s a good idea to think about the long-term implications of paying for cover this way. Because your premiums are taken out of your super balance, you reduce the amount of money available for investment growth. Although it may help your immediate cash flow, it’s important to find a balance so that you are financially protected without compromising your retirement goals.
Reviewing your life insurance periodically can help ensure you’re paying for cover that suits your current life stage.
What Is Superlinking and Split Cover?
You may be able to structure your policy to suit your circumstances. If you want to pay for a portion of your cover through your super, you may have the option to choose between superlinked life insurance or split cover.
Superlinked Life Insurance
With Superlinked life insurance, you can typically split the ownership of your life cover between your personal name and your super fund. This means you could purchase own-occupation TPD cover or trauma insurance personally and keep your life insurance inside super. This may give you more control over your cover, and you may be able to access a wider range of features and benefits.
Split Cover
Depending on the type of cover you have, you may be able to divide the ownership and funding of some of your cover.
- Split TPD Cover: Allows you to split ownership of your TPD cover between personal ownership and your SMSF. You could structure your cover so that Any Occupation TPD is held inside your SMSF, and the Own Occupation TPD definition is held outside your SMSF. This could give you more flexibility to meet your specific requirements.
- Split Income Protection: You may be able to fund part of your policy through your SMSF while funding the other portion personally. You may be able to maximise the tax efficiency of your cover and gain access to features and benefits typically available only outside of Super.
What to Compare When Choosing SMSF Life Insurance
There are a few things to consider when selecting SMSF life insurance to help you choose an option that offers the best value. This includes:
- Using a specialist life insurance broker to help you find appropriate coverage
- The amount of cover you may qualify for
- Premiums
- Policy definitions
- The entry and exit ages that apply
- Whether there are any exclusions you should be aware of
- Any built-in features and benefits
- Optional benefits
- Relevant waiting periods
- What the insurer’s claims support history looks like
Frequently Asked Questions and Answers
Can my SMSF pay for life insurance?
Yes, you may be able to fund your life insurance through your SMSF. This may help to reduce your monthly out-of-pocket expenses. However, because premiums are paid from the balance in your Super Fund, you will have less money available to you when you retire. Consider all the implications before you decide.Can I hold TPD insurance through my SMSF?
Yes, you can typically purchase Any-occupation TPD through your Super fund. Own occupation TPD cover is not available through super. You may be able to structure your cover so the Any-occupation portion is held through super, and the Own-occupation portion is owned personally.Can trauma insurance be held in an SMSF?
No, trauma insurance has not been available inside an SMSF since July 2014. The decision to exclude trauma from insurance inside Super was made because the conditions of trauma insurance contradict the SIS conditions of release.Where does an SMSF life insurance payout go?
When a claim is made on an SMSF life insurance policy, the benefit goes directly to the fund’s trustees once the policy terms and conditions have been met. The trustees then distribute the benefit to your beneficiaries once the SIS conditions of release are met.Can I transfer existing life insurance into my SMSF?
No, you typically can’t transfer your existing life insurance to your SMSF. If you want to pay for your life insurance through your Super, you will generally need to reapply for cover. It’s important to wait until your new cover is in force before cancelling your existing cover to make sure you and your loved ones are financially protected.
Get a quote to compare Insurance through Super
Or call us on:
Hello, I would like a quote for income protection, TPD and life insurance please – I already have an SMSF.
Hi Nicola. Thanks for reaching out.
We would love to provide you with a quote but need a bit more information, for example, how much cover you’d like, where n Australia you live, your age and your occupation. Kindly call us on 1300 135 205 and an insurance specialist will assist you or complete the form at the top of this page and start comparing quotes online.