Craig Day, head of technical services for Colonial First State, said in the latest SMSF Adviser podcast that most advisers would agree that income protection insurance inside super is not common – and for good reasons.
“However, it’s not entirely unheard of within SMSFs. The complexities arise in the idiosyncratic ways of getting benefit payments out and the conditions we need to consider,” Day said.
“For Total Permanent Disability, when a member suffers a total and permanent disability, the focus shifts to getting those benefit payments out. This includes understanding the types of policies you can own inside superannuation and the cashing restrictions and conditions of release rules.”
One of the significant advantages of holding policies inside superannuation is the tax deduction for life and disability premiums that go towards paying out a disability superannuation benefit.
“Inside super, TPD has to align with the cashing restriction, which looks at an ‘any occupation’ definition. If you want ‘own occupation,’ strategies exist for linking policies inside and outside super,” he said.
Another key advantage is that the value of the tax deduction means those premiums are being paid with pre-tax money. This can result in a better net cost outcome. Also, many prefer holding insurance inside super because it doesn’t impact their personal cash flow, which is crucial, especially now with the rising cost of living.
However, one thing to consider regarding holding insurance inside super is that the taxable component included in the payment is taxed at 20 per cent, plus Medicare, if the member is under age 60.
“However, even with this tax consideration, the overall benefit often outweighs the cost when you compare the level of cover you can get for the same after-tax cost,” he said.
Large APRA-regulated funds may offer cheaper premiums through group life policies, but these policies are owned by the trustee, and terms can sometimes change unfavourably.
“In contrast, SMSFs offer the flexibility of holding standalone retail policies with features not available in group policies, such as worldwide cover. Additionally, the member as trustee deals directly with the insurer, which can expedite the claims process,” Day said.
“However, advisers need to understand the compliance risk of ensuring the policy aligns with SIS conditions of release. They must be familiar with the fund’s rules and the nuances of administering these funds. Compliance errors can lead to significant issues, so a thorough understanding of the cashing rules and the administration of SMSFs is essential.”
