A guide to SMSF insurance and estate planning

Making a decision about life insurance is an essential part of your self managed super fund’s investment strategy and can provide a valuable benefit for members.

Do your members need life insurance? Trustees are required to ask this question as part of the SMSF’s investment strategy. Here are some things to consider, and tips to help you obtain the right cover and align these decisions with estate planning.

Why hold insurance within your SMSF?

If you pay life insurance, total and permanent disability insurance (TPD) and income protection premiums through super, these are typically tax-deductible expenses for the fund. This can make insurance more cost effective for members, because holding cover outside super requires payment from their personal cash flow and without tax benefits for life and TPD insurance.

The trustee of the SMSF is the policy owner and will make the premium payments and the SMSF member is the insured person.

SMSFs can hold insurance cover that meets one of the following superannuation conditions of release:

  • death (life insurance), including terminal illness benefits
  • permanent incapacity that causes the fund member to permanently cease working in any occupation that suits their education, training and experience (TPD)
  • temporary incapacity that causes the fund member to temporarily cease working (income protection).

You can tailor your SMSF’s life insurance policy to meet the individual needs of members, including waiting periods and sums insured. This can make SMSF insurance more flexible than group insurance cover provided by retail or industry super funds, although group insurance can provide more cost effective cover.

It’s also possible to take out property insurance, audit protection insurance and trustee insurance within your SMSF. This can help you protect the value of property within your SMSF portfolio, or cover trustees or directors for legal liability in the event of a compliance error.

Why keep insurance outside your SMSF?

Seek financial advice before cancelling any existing insurance policies or transferring your entire industry or retail super balance into your SMSF.

Your existing insurance arrangements may provide greater benefits than you can obtain today, or be more cost effective.

Options include:

  • leaving some funds in your existing Australian Prudential Regulation Authority (APRA)-regulated fund to maintain your existing insurance cover
  • replacing your insurance with new policies in the name of the SMSF
  • taking out insurance outside super, or
  • choosing not to have insurance at all.

If you do choose to take out new policies within your SMSF, talk to a personal insurance specialist. Some insurers offer policies designed for SMSFs, proving the benefit of group discounts.

It’s also important to remember your insurance premiums will be paid from your fund, potentially reducing your retirement savings balance. If you do make a claim, the insurance benefits, when subsequently paid from the SMSF may also be taxed differently than if your policy was held outside super.

Managing your insurance premiums and benefits

Insurance premiums will be paid monthly or annually from your SMSF bank account, so make sure you have sufficient funds to make those payments.

If third party authority is enabled, approval notifications ensure trustees remain in control of cash flow.

Plan your exit strategy

Your super is likely to be one of your most valuable assets, so it’s important to align your estate planning with your SMSF strategy. A specialist financial adviser and legal adviser can put arrangements in place to ensure death benefits are paid from the SMSF as a lump sum, income stream, or a combination of the two.

They can also help you set up processes to ensure the SMSF can continue, even if one member dies unexpectedly. Rather than rush to wind up the fund if a trustee’s failing health limits their ability to effectively manage investments, it may make sense to outsource investment management to a financial adviser. This gives the SMSF members time to make the best decision for their financial security.

Even if you are an SMSF trustee/director, you may still want to make a death benefit nomination. The nomination only applies when you pass away, at which point you will no longer have a say in how the fund is run. A death benefit nomination that is binding on the trustee helps to ensure your wishes are implemented.

As with every decision within your SMSF, you need to ensure the fund continues to fulfil its purpose. Insurance and estate planning are important tools to mitigate the risks involved and preserve your capital for your family’s future financial security.

Source: Macquarie