SMSF Insurance: What trustees need to know

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 benefits of insurance in an SMSF?

Many people have their life and disability insurance through their SMSF 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 by your SMSF.

How do you arrange SMSF insurance?

When you arrange insurance through your SMSF, the SMSF should apply for a personal insurance policy – not a superannuation policy. Makes sure the insurance company knows this is for an SMSF as they will be familiar with the types of insurance SMSFs are allowed to have. It is important to make sure the definitions of terms such as permanent disability and temporary disability in your insurance policy match up with the superannuation rules. In fact, funds can no longer take out new policies where the definitions don’t line up.

Tips for arranging insurance through your SMSF

• Arrange your new insurance in your SMSF before you cancel other policies you have, including policies in your previous super fund. This protects you from missing out on insurance if there are delays or other problems with your new insurance accepting your SMSF’s application. So if you are transferring your whole super balance from your old fund into your SMSF make sure you arrange for your new insurance to become effective before you make the transfer.
• Make sure the name of your SMSF is on the policy documentation as the owner of the policy.
• Remember, this means that if you die (or become ill or disabled – ie meet the requirements to make a claim), the money isn't paid directly to you or a beneficiary such as your spouse. It is paid to your SMSF which then makes any payments required.  In some cases, the beneficiary might use the insurance pay out to start a pension and draw it down over time, along with the rest of your super balance.
• Send Heffron (your Fund Administrator) a copy of the policy as soon as possible so that we can review it for you and make sure it meets all the SMSF requirements.
• Always pay the premiums from your SMSF, not from your personal account.
• Your SMSF can claim a tax deduction for insurance premiums, including some premiums that would not be tax deductible if you had the insurance cover in your own name. We will review the insurance policy and take care of this when we prepare your fund's tax return.
• Get help from an adviser if you are unsure about whether all your insurance needs are covered.

You may also be interested in...

• SMSF Trust Deeds
• SMSFs and GST
• Binding Death Benefit Nomination (BDBN)
• How to set up an SMSF

This article is for general information only. It does not constitute financial product advice and has been prepared without taking into account any individual's personal objectives, situation or needs. It is not intended to be a complete summary of the issues and should not be relied upon without seeking advice specific to your circumstances.