Underinsurance is widespread in Australia and SMSF members are no different. The Federal Government’s Cooper report estimated that only 13 per cent of SMSF members have any form of life insurance cover.
Requirement to consider insurance
SMSF trustees have a regulatory requirement to consider insurance as part of the regular review of the fund’s investment strategy.
Types of insurance or a minimum level of cover have not been specified however, it would be prudent to consider the personal insurance requirements of the members including life, TPD and income protection insurance, and whether cover is appropriate in the SMSF. In their review, trustees should consider ages and circumstances of the members, as well as premium cost, tax deductibility of premiums, taxation of benefits and conditions of release.
It is important that SMSF trustees can provide evidence that they have fulfilled their obligation i.e. they should document the review process they have undertaken, their decision on whether to take out insurance cover on the members or not, and their reasoning. A breach may result in:
- Freeze of the fund’s assets
- Suspension/removal of trustees and appointment of acting trustee
- The fund can be declared non-complying or
- The trustee(s) can be prosecuted (under the Civil Penalty provisions).
The new world – insurance in super
Since 1 July 2014, super fund trustees are prohibited from providing members with insured benefits other than those which satisfy the superannuation conditions of release for:
- Death – a condition of release, so there is no material change to the insurance definition.
- Terminal illness – a separate condition of release. Under superannuation law, two medical certificates are required certifying a terminal medical condition – one from a registered medical practitioner and one from a specialist.
- Permanent incapacity (TPD) – ‘Own occupation’ TPD policies pay a benefit where the client is unable to work in their current occupation and these policies are no longer permitted in super. ‘Any occupation’ TPD definitions that pay lump sums for loss of limbs or sight, and so forth, without requiring the fund member to suffer permanent incapacity, won’t be permitted.
- Trauma – there is no matching condition of release. Trauma cover is no longer permitted in super.
- Temporary incapacity – a member’s temporary incapacity means their ill health has caused them to cease gainful employment, but that doesn’t amount to permanent incapacity. To cease gainful employment includes to temporarily cease to receive any gain or reward under a continuing arrangement to be gainfully employed. Grandfathering of pre-1 July 2014 insurance benefits means that existing benefits can continue to be provided.
Why hold Insurance through an SMSF?
Cash flow and tax efficiency are the two primary reasons that insurance is held in a superannuation fund (including an SMSF). When there is insufficient money, for example, due to fluctuating income or cost of living pressures, the insurance premiums can be funded from the client’s account balance or employer super contributions thus preserving disposable income.
Significant tax savings can be achieved by funding insurance from pre-tax (salary sacrifice and personal tax-deductible) super contributions. This is especially so for clients in the top marginal rate of 49 per cent (includes Medicare levy and the 2 per cent Budget Repair levy for 2015-16).
If you would like to discuss insurance within your SMSF, or in general, please contact your local Accru adviser.
