SMSF Life Insurance
Life insurance and self-managed superannuation funds
Life insurance has gone hand-in-hand with superannuation for many years. Most retail and industry funds offer an element of basic life cover as a built-in feature, and for an alarming proportion of Australians this is the only life insurance they have.
There are several advantages to holding your life insurance policies in your superannuation fund:
- The money in the fund can be used to pay the premiums, so you don't have to find any additional cash to pay for them. If you have an employer who makes compulsory contributions then this money will have been paid direct into your superfund, so you won't even miss it.
- Any contributions you make to your superfund are likely to be tax deductible, so anything paid for out of the fund is effectively bought tax-free. This means your insurance premiums can be 20 – 45% cheaper, depending on your tax rate.
- The superfund will also be able to claim a deduction for some types of insurance premiums, reducing the tax it has to pay on other income.
- There can be more tax advantages, especially for term life policies, when the superfund passes on the benefits to your financial dependents.
- Some funds (including some SMSF providers) have negotiated bulk discounts with insurance companies so you can get cover at better rates.
Other reasons to consider SMSF life insurance
If you have a Self-Managed Super Fund, then there are several other reasons to consider making at least some of your life insurance arrangements through your retirement fund:
- Since 2012 Australia has had rules which require SMSFs Trustee to consider life insurance as part of the fund's investment strategy and keep a written record of the decision including reasons for inclusion or exclusion of insurance. This doesn't mean life insurance is compulsory, the rule simply requires that Trustee consider and document an insurance strategy.
- There can be powerful additional tax advantages to holding your policies within an SMSF rather than an ordinary superfund.
- With the right structuring you or your dependents could end up with more money from an insurance payout than if you held the policy direct. Some insurers allow you to link policies held inside and outside your SMSF to give you the best possible benefits.
- It is becoming more and more common for people to borrow within an SMSF, for example a mortgage on an investment property. Taking out life cover can be essential to ensure the fund can repay the loan if you die or are unable to work and make contributions.
The importance of seeking professional advice
Here's an overview of how life insurance works with your SMSF:
When taking out insurance through a Self-Managed Super Fund, the fund will be the effective owner of the policy, rather than the individual. Superannuation rules mean that the Trustee will only be able to release money, including proceeds of a claim, if you meet terms of release conditions, which could leave you unable to access the cash when you most need it.
There can be some serious implications to holding your insurance within your SMSF so it's vital to plan ahead and get expert advice from your accountant or financial advisor on how to set up your policies.
SMSF Life Insurance
If you are holding a life insurance policy within your SMSF then the fund will be the legal owner of the policy. This means the premiums must be paid out of the money owned by the fund.
If your SMSF doesn’t receive regular investment income or employer contributions then you will need to make member contributions to put money into the fund, otherwise your investment balance will decrease. If your fund is investing in shares or property and doesn’t keep much cash, then you’ll need to set aside sufficient funds to pay your premiums. Remember that there may be caps on the amount of money you are allowed to contribute each year, so you may not be able to top up the fund to cover your premiums if you over-invest.
It’s essential that you ensure there is always enough money in the SMSF’s account to cover the premiums – if you fall behind with the payments your policy may be cancelled, leaving you with no insurance cover.
As the legal owner of the policy, the Trustee of your SMSF will have to make the claim on your behalf. If the claim is successful the insurance company will pay the money into the account of the SMSF, and the money will belong to the fund.
The fund will only be allowed to transfer the money to you or your family if you meet one of the release conditions set by the Australian Tax Office. These conditions may be similar to those of the insurance company when you make a claim – but this may not always be the case.
To release your benefits your SMSF will have to consider your case and make a documented decision to pass on the money. Even in straightforward situations this could delay your access to the money (especially if you are the Trustee of your SMSF and you are injured or ill).
Remember that if you are the Trustee as well as the beneficiary of your SMSF you must keep these roles separate. You have to comply with the rules and act in the interests of the fund whenever you are making decisions as a Trustee, even if your personal circumstances are difficult and you really need access to the money.
Most retail or industry superfunds offer some units of death benefit or TPD insurance. By using your SMSF instead of a retail fund you are able to considerably increase the level of your insurance cover, as well as choose other options.
In most cases your SMSF will be able to buy a combination of term life, TPD and income protection policies. Since April 2010 they have also been permitted to hold trauma insurance, but this type of policy is often better held outside of your SMSF.
Some insurance companies allow you to link policies together with some elements held inside the SMSF to maximise the tax benefits, and other policies held outside to provide better access to the money if you make a claim. This can also serve to lower the overall cost of premiums.
There are a number of things to think about when using your SMSF to buy life insurance:
- It’s vital that you get the right ownership structure for your insurance cover. SMSFs are not allowed to make payments on life insurance policies unless they are the legal owner of the policy – which means they are also the legal owner of any payments made under it. Some policies, such as trauma insurance, should generally not be owned by an SMSF.
- It is not possible to transfer your existing insurance into your SMSF. You will need to set up new policies to replace it. If your circumstances and health have changed since you set up your original policy this might not be to your advantage as cover could be more expensive or your policy may exclude additional medical conditions. Make sure you don’t cancel the old policy too soon and leave yourself unprotected during the transition! Expert advice is essential to ensure no mistakes are made in these circumstances so make sure you contact your accountant or financial advisor before making any moves to cancel existing policies.
- If you are buying life insurance through your SMSF to replace cover you held in your old retail or industry fund, remember that it could take some time to set up your new policies. Make sure that you don’t cancel your existing policies until your new arrangements are fully in place, which may mean you need to leave enough money in your old fund to pay the premiums for as long as necessary.
- The tax implications of using your SMSF to hold your life insurance cover will vary depending on your individual circumstances, including your tax arrangements and who will be the beneficiaries of your superfund. You’ll need to speak to your financial advisor for specific tax advice.
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