Should an SMSF include Life Insurance?

Firstly what is an SMSF?

An SMSF is different to an industry or retail super fund – it’s a private super fund that members manage themselves, including how and where the funds are invested. Instead of getting your employer super contributions into an industry or retail superfund, your superannuation gets paid into the SMSF you manage personally.

An SMSF is different from other super funds in that SMSF members are also the trustees of the fund, except where a corporate trustee is appointed (in which case all members must be directors of the corporate trustee). In practice, this means that SMSF members manage the fund themselves for their benefit, and they are responsible for complying with all taxation and superannuation regulations.

Between two and six members are allowed within an SMSF although care is needed when determining the number of members because some State and Territory laws restrict the number of trustees a trust can have to less than six.

Please note that the information we provide here is not advice but general information only. SMSFs are complex and as a matter of practice require minimum investable amounts. You need to seek professional advice before considering one.

What is the role of Life Insurance within an SMSF?

In July 2013, it became required by law for all SMSF Trustees to ensure life insurance is considered for all members of their fund when preparing their investment strategy.

This includes consideration through regular reviews (at least annually) of the fund’s overall investment strategy and also, highlighting the relevance and importance of having life insurance under superannuation, even though the members are not obligated to take it out.

Why was there a push to bring the two together?

Many Trustees may have opted for an SMSF facility so they had greater control over their own investment strategy, portfolio and outcomes. In some ways, it may seem to be counterintuitive for them to have to manage and oversee other requirements and other expenses such as the payment of premiums for life insurance.

Successful retirement planning is essentially about being prepared for anything. The opportunity for SMSFs is to assist in addressing ongoing underinsurance concerns. Having SMSF Life Insurance in place may help secure each member’s savings and investments should the unfortunate event of death or disability occur to the member, on whom the spouse and dependants may rely so heavily financially.

The government’s Cooper Review into Superannuation released in 2009 noted that only 13% of SMSFs include life insurance. This likely means many members are placing themselves at far greater risk compared with members of other APRA-regulated super funds who have life insurance readily available to themselves and their members.

4 key reasons why Life Insurance within an SMSF works better within the one structure:

1. Cash flow

   The major benefit and most popular attraction for having life insurancewithin an SMSF, as opposed to outside of it, is that your basic regular contributions to your super fund (if self-employed) or paid out of your gross (untaxed) income, through your employer (subject to the concessional caps). This can assist by taking the pressure off your day to day budgeting, as you don’t need to actually manage these payments as they will be deducted automatically from your SMSF account contributions.

2. Tax benefits

Under superannuation, Life Insurance and Total and Permanent Disability insurance (TPD)are often paid from concessional capped contributions to your superannuation or income that has been taxed at a concessional rate. This would not be the case with these forms of life insurance if they were maintained outside superannuation under a separate policy which must be paid from income that is taxed at your usual income tax rates.

1. Property protection

   If you are investing in property, particularly if through a Limited Recourse Borrowing Arrangement (LRBA), life insurance is particularly useful. Without life insurance in place, an SMSF may be forced to sell other investment assets should a fund member pass away if no life insurance was available to make payment. This can be even more difficult where property is owned by more than one member within the SMSF.

2. You choose

   As the policy owner of life insurance within your SMSF, you can maintain the advantage of choice. However, there are always ongoing changes to superannuation regulations and policy which the Trustees need to constantly monitor and be aware of.

As always, you should always seek the advice of financial, legal and taxation professionals to assist with your own specific situation.

Sources

http://www.insurancewatch.com.au/life-insurance-for-self-managed-super-funds-or-smsfs.html
https://www.ato.gov.au/Super/Self-managed-super-funds/
http://www.smsfessentials.com.au/news