What to consider when looking into
Setting up an SMSF comes with many benefits and some risks. As property is considered an illiquid investment, (hard to sell) holding life insurance can be a great way of managing this risk to your SMSF and managing the debt on the property, in the event something happens to one of the members of the fund.
The decision many new SMSF members face, is whether to maintain the insurance that they hold within a retail, industry or employer default fund or if applying for new insurance via their SMSF is a better option.
Compare SMSF Insurance Providers
DIRECT - TV
No Medical Check
Does Not Pay Out
Compares Price & Providers
Gets Expensive to Hold
RETAIL / INDUSTRY OR GROUP INSURANCE
- Easy to obtain – No medical checks required
- Not as comprehensive as standalone insurance
- Barriers to access benefits
- Insurance premiums are not tax deductible
- Life & Tpd* insurance is 100% tax deductible
- More comprehensive but requires medical assessment
- Fewer barriers to access benefits
- Approximately 10% -30% higher in cost
Types of Insurance cover
Life Insurance cover pays a lump sum benefit to your spouse (dependant) or children ( non dependants) or estate if you die during the period of cover.
Life insurance in super is tax deductible and more cost effective than holding it outside super.
TPD cover is Insurance that pays out if the insured person becomes Totally and Permanently Disabled.The payment can be used to pay, ongoing medical expenses, home modifications, or to hire home care services such as nursing, cleaning and cooking or to pay off debts. The any occupation definition is allowed in super, with a tax deduction to the super fund.If the insured person cannot perform any job, the insurance company will pay the claim. For professionals, the own occupation definition is preferred, but this policy cannot be held in super.
Income Protection Insurance
Income cover is probably the most essential type of insurance cover because your income determines your standard of living, your ability to build wealth and your capacity to provide for retirement.The amount of cover is usually restricted to 75% of your gross salary. Premiums are tax deductible only when held personally. Income protection should not be held in super, but often industry fund members hold ‘salary continuance’ insurance which is a 2 year benefit period.The problem is in most instances is a claim cannot be accessed by the insured as a condition of release such reaching pension age ( 55-65) must be met for the release of money held in a super fund.
Trauma insurance pays a lump sum in the event that you suffer a major injury or illness such as heart attack, stroke or cancer or if you injure your knee. This insurance cannot be held in super, but is an essential insurance cover that is highly recommended for everyone as it an insurance that many people claim on.
The problem with super Insurance Cover
The first hurdle is getting paid on your super insurance policy when held in a retail/industry fund. This may be subject to a medical assessment at the time of claim and in most instances, a claim once paid, cannot be accessed by the insured, as a condition of release such as reaching pension age of 60, must be met for the release of insurance proceeds for TPD and Salary continuance policies, which are held in a super fund. Where TPD cover is concerned, there may be tax consequences if the claim is before age 50 and or even under age 60.
Some things to consider with insurance policy structuring:
- Benefit periods can vary from 2 years to age 65 for life or accident cover
- Waiting periods (the time before a claim is paid) can range from 14, 30 or 90 days to even longer
- Calculating cover amounts can get complicated based on cost and benefit
- Claims benefits can be escalated in line with inflation
- Your occupation determines your premium and some companies exclude some occupations altogether
- Policy definitions can vary greatly between companies especially the definitions of “total disability” and the differences between “own occupation” and “any occupation” and “Indemnity” vs “Agreed Value”
- Premiums can be “Stepped” “Level” or “Optimum”
TIP: Most of these policies can be funded from a SMSF, but buyer be aware, that funding policies held outside or inside of super using super contributions can dilute your super savings, which can be detrimental to wealth creation and property acquisition strategies.
Sally is setting up an SMSF and has $150,000 life and TPD in two super funds. She has decided to rollover all her super and obtain insurance through her SMSF. If something happens to her she is aware that she will have NO insurance during this period. However, she applies for her new insurance via her SMSF, while she is setting up her SMSF, before her super rolls over from her retail fund. This will leave no gap in coverage and when her new insurance is approved she can complete the rollover of her super thereby ceasing the cover automatically.
John has $400,000 of life and TPD insurance in his retail super fund. John decides to maintain all the insurance held within his employer nominated super fund, by leaving $2,000 to maintain these policies till he obtains new cover in his SMSF.