A trustee obligation
Insurance inside your fund: what you have to consider.
Trustees must consider cover for every member as part of the fund's investment strategy. Deciding against it is fine. Never thinking about it is the part that fails an audit - and the part that hurts when something happens.
What a fund can hold
Four kinds of cover, and which ones fit.
Cover held in super has to line up with a condition of release. Where it does not, the fund can end up holding a benefit it cannot pay out.
Life cover.
Pays a benefit to the member's dependants or estate on death. The most common cover held inside super, and generally straightforward for a fund to hold.
Total and permanent disability.
Can be held in a fund, but the definition matters: cover written to a stricter 'any occupation' standard aligns with a condition of release, while an 'own occupation' policy may pay the fund a benefit it cannot release to the member.
Income protection.
Can be held inside super, and the premiums come from the fund. Payments are generally released to the member while they meet a temporary incapacity condition.
Trauma cover.
Generally not able to be held inside super for policies taken out since 2014, because a trauma event does not line up with a condition of release. It is usually held personally instead.
The trade-offs
Cheaper now, smaller later.
Holding cover inside super is a genuine trade rather than a free lunch, and the arguments run in both directions.
Premiums come from the fund.
Which helps cash flow now - you are not paying from take-home pay - but it also means the cover is quietly reducing your retirement balance every year.
The fund may get a deduction.
Premiums for cover aligned with a condition of release are generally deductible to the fund, which is taxed at 15%. That can make cover cheaper in super than outside it.
A benefit has to be releasable.
The trap in the whole subject. A fund can be paid an insurance benefit and still be unable to hand it to the member, because payment out of super needs a condition of release to be met. Matching the policy definition to the rules is the point.
Tax on the way out is different.
A death benefit paid from super to a non-dependant for tax purposes - an adult child, typically - can be taxed, where the same cover held personally would not be. That is worth knowing before you choose where to hold it.
Where it connects
It is a liquidity question too.
Premiums come out of the fund, so a fund with almost everything in a single property has to be able to keep paying them. That is the investment strategy's job, and it is the same buffer a lender asks about.
Insurance in super, answered.
Do SMSF trustees have to hold insurance?
Not hold - consider. The regulations require trustees to consider whether to hold insurance cover for each member as part of preparing and reviewing the fund's investment strategy. Deciding not to hold cover is a valid outcome; not turning your mind to it is the compliance failure, and it is one an auditor looks for.
What insurance can an SMSF hold?
Cover that lines up with a condition of release: life, total and permanent disability, and income protection. For policies taken out since 1 July 2014, trauma cover generally cannot be held in super because a trauma event does not correspond to a condition of release. TPD is the one to watch - an 'own occupation' definition may not align, so a benefit could be paid to the fund and then be stuck there.
Is it cheaper to hold cover inside super?
In cash-flow terms usually, because the premium comes from the fund rather than from your take-home pay, and premiums for eligible cover are generally deductible to a fund taxed at 15%. But it is not free: every premium reduces the balance compounding toward your retirement. Whether that trade is worth it depends on your balance, your cash flow and who the cover is for.
How is a benefit taxed if it is paid from the fund?
It depends who receives it. A death benefit paid to a dependant for tax purposes - a spouse, or a child under 18 - is generally tax free. Paid to a non-dependant, most commonly an adult child, the taxable component can be taxed. Cover held personally does not have that issue, which is one of the real arguments for holding some cover outside super.
Does the fund need enough cash to pay premiums?
Yes, and it is a liquidity question the investment strategy has to answer. A fund holding a single property with very little cash can find itself unable to pay a premium, and a lapsed policy is the worst possible time to discover the strategy was too tight. It is one of the reasons lenders want a buffer left in the fund after a property settles.
Can you advise on cover inside our fund?
Yes - personal insurance advice is one of the things LINK Wealth is licensed for, and it is a specialty here rather than a sideline. What is on this page is general information about how cover works in a fund; what suits a particular member depends on their circumstances and is a conversation, not a web page.
Innovative solutions. Unmatched service. Delivered as promised.
Is the cover in your fund the right cover?
Definitions, ownership and who receives the benefit are where this goes wrong, and they are all fixable before they matter rather than after.
Call us
(07) 2101 4377Find us
Level 1, 57 Berwick Street, Fortitude Valley 4006
5.0 · based on 35 Google reviews