by Duc Hong
SMSF trustees are not required by law to take out life insurance cover for members. They must however, consider the insurance needs of each member when preparing their investment strategy.
The factors that the trustees should take into consideration when working out the appropriate level of insurance cover includes:
- Their current level of debt; and
- Whether they have any dependents. For instance, how their dependents are provided for should an unforeseen event occur.
For members to receive their insurance proceeds, they must meet a condition of release. For this reason, only the following insurance cover is offered to SMSFs:
- Death (i.e. life insurance);
- Permanent incapacity, which causes the member to permanently cease working (i.e. total and permanent disability insurance (TPD with any occupation definition)); and
- Temporary incapacity, which causes the fund member to temporarily cease working (i.e. income protection insurance).
Before deciding to take out an insurance policy, it is important to consider the following:
- Insurance premiums paid by an SMSF can free up personal cash flow;
- Premiums can be paid using pre-tax contributions, such as employer or personal concessional contributions;
- Life insurance and TPD premiums are deductible for the SMSF however, they are not if they are held outside super;
- Existing polices held personally can be transferred to an SMSF however, not all providers are willing to do this or may charge a fee to change the policy owner;
- Insurance held through an SMSF can be tailored to the individual’s personal circumstances unlike policies held for a large group, such as those offered by large public funds;
- The cost of funding insurance premiums can inhibit the growth of the SMSF. This can be countered by making extra contributions however, this may impact a client’s contribution caps;
- Trustees of an SMSF may find themselves having difficulty releasing insurance proceeds from the fund, as older “own occupation” TPD definitions may not meet the condition of release; and
- If insurance proceeds need to be paid to a dependant, such as on a life policy, the tax implications also need to be considered. If a life policy was held personally, the insurance proceeds can generally be paid to anyone tax-free however, if the policy was held in an SMSF, they can only be paid to a dependant tax-free. If the proceeds are paid to a non-tax dependant, tax will need to be paid on the death benefit.
Therefore, from what was illustrated above, the trustees should be made aware of the benefits as well as the potential consequences when considering to hold an insurance policy via an SMSF or transferring an insurance policy held personally to an SMSF.
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