As a responsible SMSF trustee, you would be reviewing your fund’s investment strategy yearly; but are you properly reviewing your personal insurance when doing so? Considering your fund’s insurance strategy can prove far more valuable than just a legal ‘tick-and-flick’ exercise, helping you protect your wealth while putting more funds back into your pocket, rather than the tax man’s.
We provide you with all you need to know about the tax-deductibility of buying insurance within your self managed super fund and how SMSF Loan Experts can help.
What personal insurance cover is available in an SMSF?
The noise around insurance products these days can be deafening which can cause even the most diligent SMSF owners to tune out. Let us help you dial you back into the right frequency by recapping the types of personal insurance cover available to you via your SMSF.
The most commonly recognised form of personal insurance is Life Insurance, which provides a lump-sum payment upon the death of the insured person. How much cover you hold is completely dependent on your personal circumstances and is referred to as your ‘sum insured’. The death benefit usually goes towards paying out any debt held, ensuring that your hard-earned assets are kept in your estate and not sold to pay down debt.
Often ‘in-built’ to life insurance policies is a terminal illness benefit, which means that life cover benefits can be accessed early in the tragic circumstance that the insured is diagnosed with a terminal illness.
Total and Permanent Disability insurance
Referred to as TPD Insurance, total and permanent disability insurance is as it sounds — it provides cover in the unfortunate event that the insured person suffers temporary disability or permanent incapacity. The definition of what constitutes a total or permanent disability is often complex, with the government making some significant changes in recent years to align TPD insurance policies with the conditions of release of a super fund under the Superannuation Industry (Supervision) Act 1993.
Income Protection Insurance
Income protection insurance has been heavily advertised within the general insurance space lately, but many investors remain unaware that it is available within their superannuation fund. The income protection insurance premium is generally tax-deductible, whether it is in your SMSF or paid personally out of your back pocket.
Income protection cover helps protect your income in the event that you have prolonged ill health or experience temporary incapacity from being able to go to work. It’s important to remember that income protection doesn’t cover your income in the event that you lose your job and that you do need to satisfy a waiting period of at least fourteen days before being able to claim your income protection insurance. Your benefit is usually a monthly payment made to you for a set period of time. An income protection policy is incredibly valuable to hold, particularly if you do not have large cash reserves to cover your financial commitments, should anything happen to you.
What insurance can’t I have in my SMSF?
There are, of course, some forms of insurance that you can’t hold in your SMSF; these are typically some general insurance products such as health insurance, car insurance or home and contents insurance, as well as Trauma insurance. Trauma insurance does constitute personal insurance, however, since 2014, it has not been permitted to be established in superannuation funds. Some life insurance policies will include an element of trauma insurance, such as early access to insurance benefits in the instance a terminal illness diagnosis is received.
You might have seen Trauma insurance referred to as ‘critical illness’ insurance; it provides a lump sum of money when you go through a medical trauma, such as being diagnosed with a terminal medical condition. While it is important to look at Trauma insurance as part of your overall risk insurance strategy, it’s not available through your SMSF and is not tax-deductible.
Explaining the tax deductibility of insurance premiums in SMSFs
Insurance owned via an SMSF isn’t always fully tax-deductible, but absolutely provides more tax deductions than holding the cover elsewhere. It’s important to distinguish that, having your life insurance and income protection policy owned and paid by your SMSF, the tax deduction is for the SMSF — not you personally. Therefore the tax deduction is at your SMSF’s marginal tax rate (being 15%) rather than your own.
The advantages of holding personal insurance cover in your self-managed super fund
It may seem fairly apparent by now, but the major advantage of holding personal insurance cover in your SMSF is that the life and TPD premiums are tax-deductible and can effectively take less of a hit to the fund’s earning when conducting the annual tax return. Obviously, in turn, this also effectively lowers the cost of the total premium and is not available if a member holds the cover outside the SMSF or in standard superannuation.
Large public super funds will often lure members in by the promise of cheaper premiums. However, the cover is often ‘group’ cover and can’t be tailored to the member’s unique personal and financial needs. Fortunately, fully tailored cover is available when held via an SMSF.
One of the other major upsides to holding insurance via your SMSF is that the premiums are funded by the SMSF, not you! Any improvements to personal cash flow is usually music to a wealth accumulator’s ears.
Frequently asked questions about insurance in SMSFs
We answer some frequently asked questions about holding insurance within an SMSF.
Can I transfer my existing insurance cover across to my SMSF?
The superannuation rules that govern self-managed super funds make it possible to transfer a personal life insurance policy into your self managed super fund. However, the requirements include making sure that you remain as the life insured and that the policy owner transfers from yourself to the SMSF.
How much insurance do I need?
The level of cover that you need depends entirely on your financial situation and personal objectives. Plucking a number from thin air can leave you overinsured or underinsured. Conducting an insurance needs analysis with an advice professional is a great way to understand exactly what level of insurance you need. We can put you in touch with the right person if you need.
How much will insurance premiums cost my SMSF?
Insurance premiums are impossible to determine without factoring in a vast array of personal, financial and medical factors of the person to be insured. You can’t always compare apples with apples when it comes to personal insurance, which is where a licensed financial adviser can really prove their expertise in providing an accurate quote.
What are the tax implications of an insurance payout from superannuation?
There are different tax implications for insurance benefits that are paid out from policies held under an SMSF. Life insurance lump sums, for example, will be affected by tax differently, depending on who they are paid to, and how they are paid. If a non-tax dependent receives a lump sum death benefit, it will likely be taxed. However, if the monies go to a tax dependent (such as a child under age eighteen or a spouse), the death benefit is generally tax-free.
Our top tips for holding insurance cover through your SMSF
Keep reading to discover our five top tips when setting up insurance inside your self managed super fund.
1. Seek professional advice through a Financial Adviser
Financial products such as life insurance can be a minefield to navigate, let alone put in force. The professional guidance of a licensed financial adviser can mean the difference between certainty of cover and taking a gamble on whether you will be able to claim or not. Personal financial advice is a sensible decision for anyone who owns an SMSF.
Financial product advice may be misconstrued when handed down directly from insurance companies, which may only be providing information that’s of a general nature and don’t tailor the final outcomes to align with your needs.
2. Update your SMSF Investment strategy
Your fund’s insurance set-up needs to be properly documented, so make sure that your strategy documents and deeds correctly reflect any life insurance or other insurance that you set up within your fund. This is prudent administration but also legally required!
3. Pay attention to your Product Disclosure Statement
A product disclosure statement (PDS) usually ends up as a throwaway pamphlet or a forgotten about email link, which doesn’t serve you well when it comes to knowing the ins and outs of your cover. Make sure you read the PDS at least once, so you have an understanding of what you’re covered for.
4. Structure your insurance correctly
As an SMSF trustee or fund member, you would be no stranger to the importance of correct financial product structure; the same goes for your life insurance policy and other SMSF insurances. The beneficiaries, level of cover, waiting periods, benefit periods and whether your life insurance is linked with your TPD insurance are just of the many variants in a list of seemingly endless policy structures. Protect yourself and every SMSF member in your fund by ensuring the structure is going to work for your individual fund’s needs and is in line with your overall retirement strategy.
5. Review your insurance regularly
Your situation is seldom stagnant, and you need to consider insurance during your yearly SMSF investment strategy review, so why not spend the time thoroughly reviewing your insurance cover every year? Changes in your personal or financial situation, such as purchasing a property through your SMSF can mean drastic changes in the level of cover required — or even the way your insurance is structured.
Is insurance in SMSF the right option for my fund?
One particular investor’s objectives will vary to that of a different investor, so there’s no yes or no answer when it comes to insurance. Whether insurance in super is right for you, comes down to your personal objectives, financial situation and those of the fund members. We find that many SMSF trustees want to provide cover for their fund members as they understand the importance of protecting the wealth that they and their members have built.
At SMSF Loan experts, we understand the importance of setting up a robust insurance framework to complement your SMSF property purchase, which is why we partner with industry professionals who provide financial product advice to help in securing your financial future. If you’d like to review your SMSF insurance, please get in touch.