SMSF Technical Education & Strategies

Insurance

Most people think of superannuation as a vehicle for funding their retirement benefits. Whilst this is true, the other key purpose of super that is often overlooked is the provision of financial benefits to your dependants in the event of your death, or benefits to you and your dependants in the event of your disability. Remember, death and disability are also "conditions of release" for your SMSF account.

This is a very important issue for your SMSF, and forms a vital part of your estate planning. In a nutshell, this is all about "looking after your family" if misfortune strikes. Don't assume it can't or won't happen to you.........it can and does to many people, and by it's very nature, it's almost always unexpected.

 

The three main events that SMSF trustees need to consider are:

 

- Death

 

- Total and permanent disability

 

- Temporary disability

 

Now, paying out death or disability benefits from your SMSF have to be funded somehow. There are basically three different ways to fund payouts for the above events. Your account balance, an insurance policy from an insurance company, or self insure within the fund via a self insurance reserve.

 

Why insure within your SMSF ?

There are two main reasons why individuals will obtain some or all of their insurance covers from within a super fund rather than outside of super:

 

- the premiums are tax deductable to the super fund. Life and TPD insurance is not tax deductable outside of super, whilst income protection is. Note that "any occupation" TPD is fully deductible, whilst "own occupation" TPD is only partially deductible. Click Here for info on TPD tax deductions.

 

- the premiums are paid for by the super fund, rather than the member having to pay for them out of their other monies.

 

 

Insurance policies

Life insurance / Death benefits

Life insurance is purchased where you wish to provide financial security via a large lump sum payout for your dependants in the event of your death, and your account balance in your SMSF is insufficient to meet this objective. Life insurance is paid out to dependants as a lump sum, and can be used to invest to replace lost earnings (which may be substantial), and to cover the costs of daily living, education, debt, funeral expenses etc.

 

Example: Jack is 35yrs old,and with his wife Jill, has a 2 yr old and 6 month old sons. His own SMSF account balance is $100,000. Jack decides that if he dies, he would like a total of $1.5 million paid out to his wife so his family can move ahead with their lives. This would pay off their $500,000 mortgage, and provide $1 millon dollars to be invested and provide income for Jill (which at say 6%pa would be $60,000 pa). Therefore, with only $100,000 in his SMSF account, Jack's SMSF takes out a life insurance policy on his life of $1.4 million to make up the shortfall. At his age, the annual premiums his super fund would pay for this policy will probably be fairly inexpensive. Jack's wife, who is also a member of the SMSF, may also want to take out a policy, so that if something happened to her, Jack would have less financial worries in raising the kids.

 

Total and Permanent Disability (TPD) insurance

Total Permanent Disability (TPD) insurance is usually insurance that you attach to a life insurance policy, and is paid out in the event of becoming totally and permanently disabled. In a case of TPD, you can be severely incapacitated and unable to work, yet you still need to be able to fund expenses for daily living, education, debt etc, as well as specialist care that can often be required in these cases.

 

Example : following on from our example above, Jack decides that if he has an accident and is left permanently disabled, he would want to get rid of the $500,000 mortgage, and have $1 millon dollars to be invested and provide income for the family (which at say 6%pa would be $60,000 pa). Therefore, with only $100,000 in his SMSF account, Jack's SMSF takes out a TPD insurance policy of $1.4 million to make up the shortfall., alongside the life insurance policy.

 

Temporary disability insurance

Otherwise known as Income protection insurance, this insurance can provide you with an income in the event that an illness or injury prevents you from your employment. You can generally insure up to 75% or less of your normal income, payable up to the age of 65, thereby helping you meet your regular financial commitments. Note that although there is a section of the Act that limits the payment period of this type of insurance to only two years, there is another section that, alongside an ATO determination, allows the payment period of this insurance to be longer than two years, provided the payments are for a period not exceeding the period of incapacity.

Beware of Trauma insurance

Trauma insurance is another insurance often sold with those mentioned above. It covers things like heart attack, stroke etc, and are a lump sum payout. Note however, that these amounts received from a trauma insurance claim will be a preserved benefit and cannot be paid until a member satisfies a condition of release. Don't assume that a trauma event will mean you will satisfy the "Permanent incapacity" condition of release, as this is often not the case, although you may satisfy the "temporary incapacity" condition but you can't get a lump sum payout. Therefore, if you would like to take up trauma insurance, it might be worth having it outside of your SMSF to ensure you can access it when you need it.

 

Where to get insurance for your SMSF

There's no shortage of choice here. Almost too much. Most retail banks now will offer Life, TPD, and income protection insurance at the branch, and most financial planners and life agents will too. Alternatively, there are online brokers where you can compare various providers and costs etc.