The do's and don'ts of SMSFs and insurance

The number of Australians who don't have life insurance is startling.

SMSFs can be used to minimise insurance costs, but the majority of Australian SMSF members don’t even have life cover.

It seems incredible, but research in late 2014 by Plan for Life found that 84 per cent of self-managed super fund (SMSF) members in Australia aged between 18 and 64 – or more than 630,000 people – do not have life insurance, either inside or outside the super environment.

The figures are startling, especially as there are distinct benefits of holding particular types of insurance inside your super fund.

Life insurance

“The first benefit is cash flow – you might not have enough spare cash to pay the premiums yourself, whereas your super fund is more likely to have free cash flow,” explains Greg Einfeld, a director of Sydney-based SMSF specialists Lime Super.

“There can also be significant tax benefits. Depending on the type of insurance cover you have, your super fund might be able to claim a tax deduction that you are not able to claim yourself,” he says.

On the flip side, holding life insurance outside your superannuation fund can give you more choice around premium levels.

“A relatively unknown factor in gaining your own insurance policy, as opposed to group cover [negotiated by your super fund], is that you can choose the premium level that is appropriate for you, including whether you want stepped premiums or level premiums,” advises Joshua Stega, a director of financial advice firm JAS Wealth in Sydney.

A stepped premium is recalculated at each policy renewal and, as the name suggests, it usually goes up, according to risk factors such as age. A level premium is calculated on your age at the start of the policy and the premium remains level.

“Although Australia has a large superannuation industry, underinsurance is an issue for many.”

“Depending on your age and other risk factors, selecting a level premium could end up saving you tens of thousands of dollars over the life of your policy. It will also mean that you’re able to retain insurance when you have the highest risk for insurance claims, which is age 50 to 65 years,” says Stega.

The drawbacks

While holding life insurance cover within your SMSF allows your fund to claim a tax deduction on premiums paid, there is a downside.

“If the beneficiary is an adult child then there will be tax paid on the death benefit that might outweigh the tax deduction,” warns Einfeld.

“For total and permanent disability (TPD) insurance, the tax considerations are similar to those of life cover.

“It is also important to be aware that policy terms and conditions of TPD insurance in super are usually more restrictive than policies outside super.”

Income protection

Income protection insurance is another issue.

“For many higher income earners it makes sense to hold income protection in their personal name and hold life and TPD policies in superannuation,” says Stega.

“Trauma insurance can only be held in your personal name. [But] if you are a business owner you can consider tying your personal insurances with your business insurance coverage.”

But as Michael Miller, financial adviser at MLC Advice Canberra notes, SMSF trustees may find certain insurances can no longer be held in super funds, such as own occupation disability cover.

“Talk to your insurer as many have developed split policies which hold the core benefits in the super fund, and the extra premium for added benefits is paid by the fund member as an individual.”

Overall, although Australia has a large superannuation industry, underinsurance is an issue for many. Opening an SMSF is an opportunity for consumers to review their insurance requirements and the structure of the suite of policies they hold.

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