Self-Managed Super Fund Trustees often focus on retirement savings, paying little attention to insurance and the role it can play in providing to dependants in the event of a death or disability.
The Cooper Review in 2010 made it a requirement that SMSF trustees consider insurance for its members as part of their investment strategy.
Having the right insurance in place can protect you, your family and your investments if something was to happen to you. Having this protection doesn’t cost as much as you think and you can pay your premiums through your SMSF to assist with cashflow (plus your premiums are tax deductible).
Before you buy insurance for your SMSF, the most important thing you need to consider is the needs of both your SMSF and its members. Should you decide to get insurance, the following must be considered
- Personal circumstances of every member, including income, assets and liabilities
- Existing insurance coverage, if any
- The possible impact of death or disability in the family
The insurance strategy should be documented in the SMSF Investment Strategy or minutes of the meeting.
Types of SMSF Insurance your SMSF can purchase
Essentially there are four different types of insurance that Trustees of an SMSF should consider-
- Income Protection Insurance
This insurance provides a benefit if you are unable to work because of illness or injury and will assist in meeting ongoing financial expenses. The premiums are tax deductible to either the individual or SMSF. If the individuals tax rate is less than that of the SMSF (15%) it would be more beneficial to have income protection insurance outside of your super fund.
- Life insurance.
This type of insurance provides a lump sum in case of death to dependants and can assist in ongoing expenses. The premiums are tax deductible if the insurance is held within the fund but NOT if it’s held personally.
- Total and permanent disability (TPD) insurance.
This provides a benefit in case of total and permanent disability. It also assists members with ongoing financial obligations and medical care. The premiums are tax deductible if the insurance is held within the fund but NOT if it’s held personally however the extent of the premiums depend on whether the TPD insurance relates to “Any occupation” or “ Own Occupation”.
“Any occupation” is a policy that will pay a benefit to the insured person if they are unable to work in any occupation, for which they are reasonably qualified, educated or experienced, due to ill health. The premiums for this are 100% tax deductible.
“Own occupation” is a policy which will pay a benefit if the insured person is unlikely to be employed in their own specific occupation due to ill health. The premiums for this are 67% tax deductible.
- Trauma Insurance
This type of insurance provides a lump sum of money if you are struck with a major medical event. The events/diseases covered by Trauma Insurance can vary between providers however they can include:
- Heart Attack;
- Loss of Limbs;
In this case, the premiums are NOT tax deductible to either the SMSF or the individual.
Advantages and Disadvantages of insurance in your SMSF
- Trustees can customise their insurance to suit their specific needs;
- Contributions to the fund can be used to pay for the premiums;
- There are cash flow benefits. Insurance premiums are paid from by the SMSF. This reduces the burden imposed on members to look for means to pay for the insurance premium;
- Net cost savings on premiums.
- Insurance can be more expensive;
- Tax is payable on some life insurance and TPD benefits;
- Contributions to pay insurance premiums will count towards contribution caps;
As you can see, there are certainly pro’s and con’s to holding insurance within your SMSF.
Xpress Super does not provide advice in relation to insurance and if necessary, we recommend you seek advice from a licensed financial planner.