by Olivia Long
Self Managed Super Fund (SMSF) Trustees often focus on retirement savings, paying little attention to insurance and the role it can play in providing to dependents in the event of death or disability.
Holding insurance within an SMSF can enable larger superannuation beneï¬ts to be paid to dependents in the event of a member’s death or disability. One of the recommendations the Government accepted from the Cooper Review was to make it a requirement that SMSF trustees consider life and TPD insurance as part of their investment strategy. Trustees will not be compelled to take out insurance, but they will need to provide evidence that they have at least considered it. There are essentially four differing types of insurance that Trustees of an SMSF should consider.
Income Protection Insurance
This insurance provides a beneï¬t if you’re unable to work because of an illness or injury to assist with meeting ongoing ï¬nancial commitments. The premiums are tax deductible to either the individual or to
the SMSF, although it may be more tax effective if this type of insurance is held personally if the individual’s tax rate is greater than that of the SMSF (maximum of 15%). If the SMSF receives insurance proceeds the member will need to temporarily cease work due to physical or mental ill
health to be eligible to receive the beneï¬t in the form of an income stream from the super fund.
Life insurance provides a lump sum in the event of death to dependents and can help increase the amount payable to cover for loss of earnings and ongoing ï¬nancial commitments. The premiums are tax deductible to the SMSF, but not to an individual. Life insurance is commonly provided along with Total and Permanent Disability (TPD) insurance.
Total and Permanent Disability (TPD) Insurance
Total and Permanent Disability (TPD) insurance provides a beneï¬t in the event of becoming totally and permanently disabled and assists with meeting ongoing ï¬nancial commitments and any necessary medical care.
The premiums are tax deductible to the SMSF, but not to an individual. However, the extent of the premium’s deductibility for the SMSF depends on whether the TPD insurance relates to ‘any occupation’ or ‘own occupation’.
‘Any occupation’ is a policy which will pay a beneï¬t if the insured person is unable to be employed in any occupation for which they are reasonably qualiï¬ed, educated or experienced, due to ill health. If the policy is based on ‘any occupation’, then the premium remains 100% tax deductible.
‘Own occupation’ is a policy which will pay a beneï¬t if the insured person is unlikely to be employed in their own speciï¬c occupation due to ill health. If the policy is based on ‘own occupation’, 67% of the premium is tax deductible. Where a policy bundles TPD ‘own occupation’ with life insurance, the premium is 80% tax deductable to the SMSF.
Typically ‘any occupation’ policies often align with superannuation conditions of release so access to
any beneï¬t payment is often not an issue. An ‘own occupation’ TPD policy may be better held personally as access to any beneï¬t payment may not be possible until a condition of release has been met if held within your superannuation fund.
Trauma insurance is designed to pay out a lump sum of money if you are struck with a major medical event or condition covered by the policy.
The events and diseases covered by trauma insurance vary between insurance providers and depend on what level of policy you buy. Events and illnesses typically covered include:
The premiums are not tax deductible to either the individual or to the SMSF. If the SMSF receives insurance proceeds that does not coincide with the member satisfying a condition of release
under superannuation legislation, the proceeds may be trapped in the SMSF until such time that the member meets a condition of release.
Advantages of Insurance in the SMSF
Disadvantages of Insurance in the SMSF
Tax Trap in the SMSF
Where a member does not have a tax dependant, strong consideration should be given to holding life insurance outside of super. This is because the tax payable on insurance held within the SMSF upon payout, is signiï¬cantly higher than if held outside the SMSF (as shown in the case study), even more so where a tax deduction has been claimed for the premiums paid.
Tip 1 - The implications of claiming a tax deduction within your SMSF are signiï¬cant and can end up costing you dearly upon payout of the insurance beneï¬t.
Tip 2 - When rolling monies over from a retail or industry fund in your SMSF it is important to note that any insurance may cease at this date. It may be beneï¬cial to leave an amount in the account to cover the annual insurance policy or obtain a new insurance policy within your SMSF.
Tip 3 - Any insurance policies held in your SMSF need to be paid for and owned by the trustee(s) of the SMSF and not the insured person.
Tip 4 - Determining the most appropriate ownership structure for insurance involves assessing both access and tax implications of the various alternatives (among other considerations).
Tip 5 - Any proceeds from a policy held by an SMSF will be added to the member’s account and forms part of the members balance. As such a condition of release will need to be met to access the money.
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