Holding Insurance Within Your SMSF
Superannuation and life insurance are similar in many ways, as they both provide for you financially when you may not be able to provide for yourself.
Most people with industry or retail superannuation will have some level of life insurance that is provided automatically as part of the fund, and the good news for SMSF holders is that they too can include insurance as part of their self manager super fund.
There are a number of benefits to holding your insurance within your SMSF, however there are also a couple of things to look out for.
What types of insurance can be held
There are only certain types of insurance which can be held by an SMSF. Life insurance and income protection can both be held by your SMSF, however you need to ensure you have proper income protection rather than a simple accident and illness policy.
Total and permanent disability insurance (TPD) can be held by an SMSF, however there are some important restrictions which we will cover later in this guide. Trauma insurance cannot be held by an SMSF.
How insurance in SMSF works
When your insurance is held by your SMSF, you super fund becomes the owner of the policy as well as being responsible for paying the premiums. This means that all insurance premiums are paid for with your retirement savings.
As your SMSF is the owner of the insurance policy, any claim proceeds will be paid to your SMSF and not to you personally. The trustee of the SMSF must then be satisfied that releasing the claim proceeds to you personally will meet the guidelines for early release of benefits from a super fund.
The benefits to holding insurance within your SMSF
There are a number of benefits to this strategy, with the major benefits being increased personal cash flow and the effective tax deductibility of the insurance premiums.
Because your insurance premiums are now being paid for by your SMSF, you no longer have to come up with the money yourself. This is great for anyone who needs to increase their cash flow but still understands the importance of personal risk insurance.
Premiums for life insurance and TPD insurance are generally not tax deductible when held personally, however when they are paid for using the money in your SMSF they are effectively tax deductible, assuming that you claimed a tax deduction on the contributions paid into your super fund.
What to look out for
There are a number of restrictions when it comes to holding insurance within your SMSF. Life insurance on its own is fairly straightforward, as any term life insurance claim will meet the requirements for early release of your super, which in this case will be your death or diagnosis of a terminal illness.
Generally your SMSF will be able to hold a TPD policy with an ‘any occupation’ definition, but not one with an ‘own occupation’ definition. There can be considerable consequences when it comes to placing TPD insurance within your SMSF, so you should speak with a financial adviser if you are considering this strategy.
Basic income protection policies can be held within an SMSF without too many complications, however there are some extra benefits with income protection that do not meet the SMSF guidelines. In this case a claim may still be paid to your SMSF, however the fund will not be able to release the money to you until retirement.
Finally, as your premiums are paid directly from your retirement savings, the amount you will have left when you retire will be eroded due to the premiums. To combat this it is generally recommended that you make additional contributions to your SMSF to offset the premium costs.
Holding your personal risk insurance within your SMSF can be a great strategy, however it is important to consider whether or not this strategy is right for your own unique needs and objectives.
This article is about insurance within an SMSF and is general information only. It should not however be treated as factual, as personal advice or be the basis of purchasing any insurance policy. Before deciding on an insurance policy read the PDS carefully and talk to a licensed insurance agent if you need further assistance. MoneyBuddy does not recommend insurance products or provide personal advice in regards to insurance products.