SMSF Life Insurance

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:

• The type of cover you assessed.
• The variables taken into consideration during the assessment, for e.g. outstanding debts for each fund member and the needs of the member’s dependents’.
• An investigation into the cost of holding insurance within SMSF vs outside of Super.
• The level and ownership structure of the insurance.

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.

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.

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

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.

The legal requirement you must consider

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:

• 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.

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

• Their Health
• Pastimes they participate in
• Their Occupation

With all these questions to consider, this might be a good time to enlist 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.

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.