Types of insurance available to your SMSF
SMSFs can’t buy any insurance they like for their members – only certain types of cover are allowed. The same rules apply to all super funds.
Life insurance
Pays a lump sum when you die. In many policies, the payment is brought forward if you are diagnosed with a terminal illness.
Total and permanent disability insurance (TPD)
Pays a lump sum in the event you suffer an illness or injury that leaves you incapable of working for the rest of your life. In super, this is also called “permanent incapacity”.
Terminal medical condition insurance
Pays out a lump sum if you are diagnosed with a terminal medical condition that is likely to end your life within 2 years. Often this is part of a life insurance policy.
Income protection insurance
Provides a regular income (generally up to 75% of your previous work or business income) if you suffer an illness or injury that leaves you temporarily unable to work. Benefits are payable until you’re able to return to your normal work or until you reach any maximum age or payment period in the insurance policy. This type of insurance is also sometimes called “salary continuance”.
Note: SMSFs can no longer take out trauma insurance policies (these are policies that pay out a lump sum if you suffer a serious health issue like a heart attack or cancer diagnosis).
Sometimes SMSFs take out other types of insurance that aren’t related to their members – for example, SMSFs owning property might take out insurance to protect against damage to the property. This is fine. The limitations here relate to insurance that’s for a member rather than assets.
What are the pros and cons of insurance in an SMSF?
Many people have their life and disability insurance through super (rather than holding personal insurance policies) because:
- the premiums are tax deductible to the fund when the policy is in super whereas only income protection insurance is tax deductible for policies held by individuals;
- you may be eligible to claim a personal tax deduction for contributions to super which are used to fund the premiums;
- if the policy is in your SMSF, any payout will go to the SMSF rather than directly to you or your estate or beneficiaries, allowing some additional tax planning; and
- you no longer have to come up with the money yourself to pay the insurance premiums as these are now being paid for from your super.
The main downside of having your insurance through super (rather than holding a policy personally) is that any payout gets paid to your fund (in this case your SMSF) rather than directly to you or other beneficiaries.
That means the payment to you (or your beneficiaries) is a super benefit not an insurance pay out. This can have important tax consequences. For example, if you’re under 60 you’ll pay tax on any super benefit you receive because you are “permanently incapacitated” (ie the circumstances under which your SMSF’s TPD policy will have paid out). Similarly, some beneficiaries (such as adult, financially independent children) pay tax on death benefits they receive from a parent’s super. And if the parent is under 65 at the time, the tax rate can be as high as 30% plus the Medicare Levy on some of it.
These pros and cons are all the same regardless of whether the insurance is held through an SMSF or a public super fund (such as a retail or industry fund).
When it comes to comparing insurance through an SMSF vs insurance in a public fund:
- a downside of having insurance in your SMSF is that your SMSF will have an individual policy for you. That might be more expensive than the insurance you could get through a public super fund. You might also have to go through more medical checks to get it in the first place whereas you can often get a base level of insurance with no checks at all in a public fund,
- the upsides of having the insurance in your SMSF rather than a public fund is that you can tailor the cover to suit your needs and take advantage of all the extra estate and tax planning opportunities mentioned earlier. Some of these might not be possible in all public super funds.
