SMSF Insurance Guide

If you have recently set up an SMSF and are thinking of taking out life insurance through your fund, there are a number of things that you need to be aware of.

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 cancel your cover and are then are unable to take out new cover.

Once your new 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.
We are experts at helping you set up your insurance through your super fund or SMSF.

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number-1Trustee Insurance Obligations

As Trustee, one of your obligations is the need to document any consideration you have made towards 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.

number-2Types of cover available to be owned through a SMSF

Generally the following types of insurance are available to be taken out within super:

Life Insurance

TPD Insurance

Income Protection

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

Total and Permanent Disablement (TPD) Insurance pays a lump sum benefit if you become totally and permanently disabled and it is unlikely you will be able to work again.

Only certain types of TPD Insurance are able to be taken out through super:

Any Occupation TPD

Any Occupation TPD provides a TPD 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.

Own Occupation TPD

Own Occupation TPD provides a benefit if you become totally and permanent disabled and unable to work in your own occupation. From July 1 2014, this type of TPD policy is unavailable through super as it does not meet a condition of release.

Meeting a condition of release:
Generally in order to meet a condition of release, you need to:

  • Be permanently incapacitated and unlikely to ever be able to work in an occupation for which you are reasonably suited to by training, education or experience
  • Satisfy the trustee that you never intend to become gainfully employed again
  • Satisfy the trustee that retirement has occurred

If you have an existing Own Occupation TPD policy in your super fund which you took out prior to July 1 2014, your policy remains in place.

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. These may include the Rehabilitation Benefit, Accommodation Benefit and Premium Waiver Benefit.

number-3Types of cover not able to be held within Super

Trauma Insurance

Trauma Insurance is no longer available through your super fund as the lump sum benefit will not be able to be accessed by members of the fund.

If you would like to take out trauma insurance, you will need to do so with a policy held outside of super.

number-4Advantages of Insurance through your SMSF

There are a number of advantages to taking out insurance through a Self Managed Super Fund and superannuation in general.

General benefits include:

  • Easier management of your personal cash flow as premiums are paid for by your fund and not out of your after tax income.
  • Easy to manage as premiums are automatically deducted from your fund.
  • Tax effective funding of insurance premiums as contributions to the fund can be made from pre-tax money and the fund can claim a tax deduction for the premiums.
  • Annual premium discount of up to 8%.

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

number-5Disadvantages of Insurance through a SMSF

The main disadvantage is any benefit received will be paid into your super fund and a condition of release will need to be met in order to access the benefit. You may also need to meet your trust deeds rules and your insurance policy’s total disablement definition.

General Disadvantages

  • Erosion of retirement savings due to premiums being paid by your fund.
  • Taxation of Super Benefits
  • Potential accessibility issues
  • Limited nomination of beneficiaries and super contribution caps

Life Insurance

  • Certain built-in benefits and additional policy options may not be available such as the Financial Planning Benefit, Funeral Advancement Benefit and Free Child Cover
  • Non-financial dependants may pay tax on any benefit they receive
  • Potential for disputes to arise over payment of benefits as release of funds may be at the trustee’s discretion.

TPD Insurance

  • Benefits may be difficult to access if condition of release is not met
  • Premiums may not be fully tax deductible depending on your TPD definition
  • Benefits paid to you may be tax assessable

Income Protection

  • Certain built-in features and additional policy options may not be available such as the Accommodation and Premium Benefit.
  • You may only have limited choices when it comes to benefit and waiting periods.
  • Agreed value policies may not be available or may not be able to be paid in full if agreed amount is greater than pre-disability amount.
  • If your marginal tax rate is about 15%, your tax deduction may be smaller than if your cover was held outside of super.

number-6Insurance Policy Structuring

Insurers will generally offer a number of different options for you to structure your insurance policies:

Policy Ownership

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

Flexible Policy Linking

Historically, life insurance could be purchased in a number of ways:

New option for policy structuring – Flexible Policy Linking

Flexible Policy Linking was introduced to allow you to take out a combined policy but separate the ownership of the policies between superannuation owned (including SMSF) and Self Owned.

This option not only allows you to take advantage of the cash flow benefits of holding insurance within super and the savings made available by combining or linking your cover but also allowing you access to benefits that would not be available if cover was held only through super.

See examples below:
Policy Linking and TPD;

Split TPD takes the concept further and 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 TPD outside of Super, giving you access to both benefits.


Select insurers will allow you to split your Income Protection between fund ownership and self ownership. This structure gives you access to the benefits that are available both inside and outside of Super but also allowing you take advantage of the savings of your fund paying your premiums.


number-7SMSF Insurance and Tax Treatment

SMSFs are generally taxed at the concessional rate of 15% as long as they are compliant and will be taxed on:

  • Contributions
  • Interest, dividends and rent
  • Net capital gains

You should always consult with your tax accountant or agent to clarify tax implications.

Auditor fees may be able to be claimed as a tax deduction if they are incurred for income producing activities.

Are my Premiums Tax Deductible?

Generally, life insurance which is taken out through your SMSF is fully tax deductible to the fund.

Life Insurance that is owned individually is NOT tax deductible.

Depending on your type of cover, only some TPD definitions are fully tax deductible.

The table below provides a summary of Deductible Portions of TPD:

Policy Type Deductible Portion of Premium
TPD Any Occupation 100%
TPD Any Occupation with one or more of:

  1. activities of daily living
  2. cognitive loss
  3. loss of limb
  4. domestic home duties
TPD Own Occupation 67%
TPD Own Occupation with one or more of:

  1. activities of daily living
  2. cognitive loss
  3. loss of limb
  4. domestic home duties
TPD Own Occupation combined with life cover 80%
TPD Own Occupation combined with life cover with one or more of:

  1. activities of daily living
  2. cognitive loss
  3. loss of limb
  4. domestic home duties

Generally, for income protection that is held outside of super, you can claim a deduction according to your marginal rate of tax, which can be up to 45%.

Marginal Tax Table:

Taxable incomeTax on this income
$18,201-$37,00019c for each $1 over $18,200
$37,001-$80,000$3,572 plus 32.5c for each $1 over $37,000
$80,001-$180,000$17,547 plus 37c for each $1 over $80,000
$180,001 and over$54,547 plus 45c for each $1 over $180,000

For Income Protection that is held within your SMSF, 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 that they respectively pay.

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.

Are my benefit payments subject to tax?

Life Insurance

If you receive a benefit from a SMSF and you are tax dependant, the benefit will not be subject to tax.

However if you are a non—tax dependant, the lump sum benefit may be subject to tax. The amount of tax payable will be dependent on whether the benefit is a taxed or untaxed element.

TPD Insurance

The lump sum TPD benefit is generally taxed as a disability lump sum benefit.

How much tax you pay on a TPD benefit you receive from your super fund will depend on three main factors:

  • Your preservation age
  • Whether or not the money in your super fund is taxable or tax free
  • Whether you will receive the money as an income stream or lump sum

What is your preservation age?

Preservation age is the age at which you’re allowed to access your super. This will depend on when you were born:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

Taxable Super

Taxable super is generally concessional super contributions that have not had tax paid on it. This includes:

  • Employer contributions
  • Salary sacrificed into super
  • Super contributions you could claim a deduction on

If your super fund has paid 15% tax in the fund on your super, this is known as the taxed element. If it has not yet paid tax, it is known as the untaxed element.

Non-taxable super

Non-taxable super is super that has already had tax paid on it, which includes non-concessional contributions you have made from post-tax income.

Are my benefit payments subject to tax?

How much tax do I pay?

If you withdraw funds from your super before you have reached your preservation age, you will pay tax on the following:

Type of superTax Rate
Taxable super including taxed elementThe lesser of 21.5% or your marginal tax rate
Taxable super including untaxed elementThe lesser of 31.5% or your marginal tax rate

Between Preservation Age and 60

Type of superTax Rate
Taxable super including taxed elementThe lesser of 16.5% or your marginal tax rate
Taxable super including untaxed elementThe lesser of 31.5% or your marginal tax rate

Older than 60

Type of superTax Rate
Taxable super including taxed elementNo tax
Taxable super including untaxed elementThe lesser of 16.5% or your marginal tax rate

Receiving an income stream

If you are withdrawing funds due to permanent incapacity and you are under your preservation age and opt to receive an income stream rather than a lump sum, you will receive a 15% tax offset on the taxed element of the taxable super.

Income Protection

Any monthly benefit received is assessable as income to the member of the super fund.

number-8Funding your Premiums – Contributions and Rollovers

In order to pay your premiums, you need to ensure that you have enough 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.

You can generally rollover existing funds from another super fund to pay for your premiums if you wish.

You can either do a full rollover or a partial rollover:

Partial Rollover

Only a portion of the funds is transferred and the existing fund remains open. This may be important if you want to maintain any insurance within this fund.

Full Rollover

A full rollover is when all money and assets in an existing super fund are transferred into any other fund, including SMSF.

Alternatively you can make contributions to the fund in the form of money or an asset other than money, known as an ‘in specie’ contribution. There are a number of rules for accepting contributions that you will need to be aware of.

Types of contributions:

  • Employer contributions: Legally required for employers to contribution 9.5% to your super fund
  • Personal contributions made by the member of the fund
  • Personal contributions made on behalf of a member
  • Spouse contributions
  • Government co-contributions

number-9Level of Cover and Insurability

Once you have decided you want to take out cover within your SMSF, you will need to establish the level of cover you would like:

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

  • Mortgage or rent payments or other ongoing obligations
  • Day to day living expenses
  • Any entitlements you or your spouse have available including annual leave, sick leave or long service leave.
  • Children’s education expenses
  • Any other expenses you have

Your insurability may depend on your age and your individual circumstances, including:

  • Your Health
  • Pastimes you participate in
  • Your Occupation

At Life Insurance Direct we specialise in finding cover for ALL our clients. If you are uncertain of your insurability, call us today and speak to one of our consultants.

number-10Apply for Insurance

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

Generally applying for a life insurance policy through your SMSF is similar to applying for a life insurance policy that is owned individually however the Self Managed Super Fund will be the policy owner.

When applying, you will be required to provide your fund’s details including:

SMSF DetailsPolicy Owner DetailsLife Insured
Name of the SMSFName of the Policy OwnerLife Insured Name
ABN/ACN of the SMSFPolicy Owner Address and Phone NumberLife Insured Date of Birth
Name, date of birth, address and phone numbers of all trusteesPolicy Owner ABN/ACNLife Insured Address
Fund details for premium payment

number-11Claims Assessments

If your insurance is owned through your fund and you need to make a claim, the claims process is exactly the same as if your insurance was owned outside of super.

Please see our claims guide to find out more about the claims process.

Published: April 28, 2015
  • Setting up your SMSF

    A SMSF can give members greater control over their retirement savings and investments, however you need to understand your obligations of running a DIY fund.

  • Superannuation and Rollovers

    Rollover your superannuation from one fund to another to help pay for your life insurance premiums, consolidate your super or transfer to a new fund

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