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Life Insurance for SMSF’s

If you have a self-managed super fund (SMSF), it may be possible to purchase life insurance through the fund. Life insurance in SMSF’s has become increasingly popular because it often costs less to pay for premiums out of the fund. If you are considering this as an option, it is important to understand the pros and cons associated with purchasing life insurance in this manner.

What kinds of life insurance products can a SMSF purchase?

A self-managed super fund may purchase a life insurance policy for the members of the Fund. Changes in regulations that went into effect on 1 July 2014 imposed new limits on the types of new insurance policies that may be purchased by a SMSF. After this date, all new life insurance policies issued to a self-managed superfund must be consistent with Superannuation Industry Regulations conditions of release. The effect of this change is that it is now possible only to purchase insurance covering death, any occupation total and permanent disability (as opposed to own-occupation TPD), and standard income protection insurance policies (as opposed to comprehensive income protection insurance policies).

Are there any life insurance products a SMSF cannot purchase?

A SMSF cannot purchase comprehensive income protection policies, own occupation total or permanent disability insurance (TPD), or comprehensive income protection policies. These types of insurance cannot be purchased because the payouts from these policies can become trapped in a superannuation fund. While the insurer would pay the benefit to the fund if the member suffered a trauma condition like a stroke or cancer, the fund would be unable to pass the money on if conditions of release were not met. The insurance could not benefit the member if it was stuck in the fund when it was needed most.

How can you buy insurance for a SMSF?

If you wish to purchase any occupation total permanent disability insurance; a standard income protection policy; or a life insurance policy through your superannuation fund, you must find a policy that is available to be purchased in a SMSF version. Premiums for a policy purchased by a SMSF are usually the same as premiums when you purchase the fund for yourself; however, some minor benefits may be excluded from a policy purchased by a SMSF in order to meet superannuation requirements.

When you purchase the policy, you will need to specify who is to own it. If you are buying the policy for a SMSF, the SMSF trustees or the trustee company must be listed as the policy owner. You should list the trustee or trustee company “as trustee for” the fund.

Why would you want to put insurance in your SMSF?

There are many reasons to to purchase insurance through a superannuation fund. One major benefit is that the fund can pay premiums for life insurance and other types of insurance cover held by the fund. If you do not have the cashflow to pay for premiums with after-tax income, buying coverage through the fund may be the only way to get coverage.

Another advantage is to protect fund assets. If you have borrowed from your fund, your death or permanent disability could result in forced sale of assets. If you have an insurance policy to repay the loan, you ensure that property the SMSF owns will not be sold if you become unable to make regular ongoing loan payments.

Buying insurance in a SMSF can also be an important way to protect yourself, your dependents, and your loved ones. Generally, income protection policies replace only 75 percent of pre-disability income. If you follow all superannuation rules and if your SMSF acquires the right income protection policy, you may be able to get 100 percent of pre-disability income coming into your pocket. This means you won’t have to worry that disability will have an adverse impact on your family’s quality of life. Life insurance in a superfund will also provide a lump sum payment upon death or disablement so your family left behind has the income it needs.

How are premiums paid when you have life insurance in your SMSF?

When the SMSF purchases insurance, the premiums for the policy are paid from money in the fund. This means you do not have any out-of-pocket costs. If you have an employer making required contributions to your fund, you can pay for the premiums entirely from these funds. You may also increase the level of contributions you are making to your fund to ensure you can cover premiums without impacting your retirement savings. Since you generally get tax concessions for money put into your fund, the premiums are subsidized by the government because you pay for the policy with pre-tax money.

What are some advantages of having insurance in your SMSF?

There are many advantages of having insurance in a super fund. One major benefit is paying for premiums from the fund instead of out-of-pocket, and paying for the premiums with pre-tax money instead of after-tax income. Buying insurance in a fund can also provide you with broader income protection, can ensure you are able to repay a loan if you borrow from your fund, and can protect dependent children and family members.

What are some disadvantages of having insurance in your SMSF?

Limitations on the type of insurance your SMSF can buy is one disadvantage associated with buying insurance through your fund. If you pay for the premiums by drawing down on existing funds, you can also end up reducing the balance of money earning a return for retirement. On the other hand, if you increase contributions to pay for premiums, you could run into super cap limits. Tax advantaged or concessional contributions are limited to $30,000 annually as of 2015, or $35,000 each year if you are 49 or older.

When insurance pays out, it pays out to the fund and not to the individual or family. While this is not necessarily a disadvantage, you do need to ensure you plan for this when determining how your loved ones should be cared for if you pass away. There are also some circumstances in which life insurance and disability payouts from a super are taxed.

What are the tax consequences of life insurance in a super-fund?

You generally may make tax-advantaged contributions up to $30,000 to your super fund, as of 2015. When you pay insurance premiums from your fund, you can pay those premiums out of contributions made with pre-tax dollars. This can save you several thousand dollars, depending upon your tax rate. An individual with a $5,000 per year premium and a 46.5 percent marginal tax rate, for example, would pay only $2,675 for annual insurance premiums when paying with pre-tax funds.

Superannuation funds are also generally permitted to claim insurance premium costs as a tax deduction for the fund. This can reduce tax payable on member and employer contributions and investment earnings.

Who receives the death benefit when you have life insurance in your super-fund?

When an insurance claim is made on a policy owned by a SMSF, the proceeds of the claim are paid into the fund. Policy proceeds may be released as long as a superannuation condition of release is met. Death, permanent incapacity, and temporary disability are examples of situations where a condition of release is usually fulfilled and the funds can be released. However, the fact that the money is paid to the fund and not to beneficiaries can create an added level of complication when a death or disability occurs.

Should I buy life insurance in my self-managed super fund?

Buying life insurance in a self-managed super fund makes sense in many situations, but it is important to carefully consider whether this is the best option for your particular circumstances. Shop around for different insurance coverage, explore premiums, determine if the policy can be purchased by a SMSF, and then make your choice on what is best.

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