This requirement, first enacted 7 August 2012 and set out in section 4.09 2(e) of the Superannuation (Supervision) Regulations 1994, does not make insurance mandatory but does force the trustee to review the insurance arrangements for the fund on a regular basis, ie annually.
Quantum Financial principal Tim MacKay said he “begrudged” by the fact it is compulsory that insurance has to be considered.
“I mean why not have annuities in there? You don’t have to consider annuities – I think it’s a nanny-state overreach,” said Mr MacKay.
“I think it is best practice to consider it, [but] I just don’t think it should be in the legislation.”
Clients in their 80s, Mr MacKay said, don’t understand why they are being asked to consider life insurance when it’s clearly not available to them and isn’t relevant.
“Also, clients who are in the 60s and 70s; again it’s not applicable. Certainly for younger clients it is an issue and best practice, and should be considered,” he said.
“So it is best practice and a legal requirement, but I just think it’s a bit of legislative overreach.”
Read more:
Poor asset records causing serious breaches, cautions ATO
Backlash grows against super opt-out talk
Well said Eric. The Investment Strategies that we prepare for our SMSF clients are much more comprehensive than the 1-page broad brush approach they get from their accountants, that essentially allows investment in everything and specifies nothing.
The context of this article was about the inclusion of a requirement to simply CONSIDER insurance, and whether this amounted to a ‘nanny state’. No one is prescribing a pre-determined outcome for SMSFs and trustees. As Liam points out, its a prompt or reminder for those who would benefit from cover, and dont have it, to act. For those that dont need for whatever reason – age, assets, no debt, no children or dependants – they can simply say “considered and not required due to…”
The promise of insurance is the ability to offload the risk of financial ruin for a relatively small premium. For those that are happy to risk a ‘more modest’ lifestyle, don’t get cover. Simple.
While the article is of interest and the varied comments provide differing views of people who I suggest are interested in the welfare of their clients, as a SMSF auditor, I suspect the debate is only touching the surface. As the law stands, the insurance issue is one part of an SMSF’s investment strategy, all of which needs to be reviewed annually.
I suggest a better topic and discussion would be to ask how many trustees actually know what is written in the funds investment strategy and do they invest within that strategy. Most strategies I sight as auditor are nothing more than a page of generalised words that actually mean very little, which were signed by the trustee, but possibly not actually read and are simply “reviewed” annually by having a clause inserted in year-end minutes, again which I suspect the majority of trustees have signed, but not read.
If you want to discuss relevance, tackle the whole investment strategy topic, not just one small part.
I have a mix of SMSF clients across the generations and find the insurance assessment very useful. Those who need it but ignore it or keep putting it off are reminded. Those who don’t chuckle a little and like to say “assessed and not required due to….”. One other benefit is it brings up the risk of their adult children getting il or injured and them having to support grandkids. Many a client has gone from the meeting with a note to remind their children to do some risk assessments. So I believe it is not only necessary bit a useful part of the “big picture” review
Jimmy, I find it worrying that you use the “the method is wrong not the activity” closely followed by the “everyone else is doing it” defence rather then just condemning illegal activity. Your shoot the messenger comments are hardly a repudiation of the conduct.
I am equally cutting and derisive towards accountants who undertake illegal activity and try to enrich themselves at their clients expense.
But I think you will find, and ASIC will find, that the number of accountants doing the wrong thing is far short of the 37% of insurance advisers that “did not comply with the law”
Gary, living with less is not replacing the income you had prior to suffering an accident or illness that forces a reduction in your level of income. That’s the issue. A meagre lifestyle IS an option, but given an informed choice is that truly the option you WOULD choose??
Before IP, people became destitute, sold their homes, lost their assets, families broke up, suicide, etc. All great options and outcomes.
Most people set aside at least 10% or so of their income to replace their income in retirement, whats wrong with looking to allocate a smaller percentage to protect & replace their income prior to retirement?
As I said below Gary, which you couldn’t or didn’t read, this article isn’t about underinsurance or choice, it was about having a simple line in the SMSF Investment Strategy to say you had considered insurance – considered & arranged v considered & no cover. Simple. No need to have cover. 100% choice of the trustee/member.
Jimmy #15 – again you have failed to see the point I am trying to make. There are always options to replace income. Sometimes that option is living a more meagre lifestyle, or there is a combination of some of the options I have presented. I am sure you are a smart guy, it doesn’t take a rocket surgeon to think of some other ways. Yes it’s hard, but what do you think people did before there was IP insurance?
I will reiterate, it is not for you to say whether someone is underinsured or not, and it shouldn’t be for the Trustee of their super fund to say either. It is up to individuals to decide. Having a government mandate for all Trustees to consider it is removing people’s ability to think for themselves. Having commercial funds make you opt-out of insurance that is taken from income most people don’t see removes that choice altogether.
It’s time that the government started treating people like adults instead of children.
Elaine, that’s good that you recognise that. But as the so-called ‘trusted professional’ for your clients, don’t you think you have a professional obligation to ask a few simple questions about their situation? Something that might highlight the risks they face? Do you think that if your clients have home loan and/or business debt, have a spouse, have children, that it would be prudent and professional to simply ask ‘what if?’??
You don’t have to have the solution or provide the advice. You just need to make your client aware and point them to a trusted referral partner that can. And if your client is named Gary and doesn’t think that its a bad thing to have your income interrupted or stopped completely, you could get them to sign a letter to that effect to protect yourself. And if they have an SMSF you could include it in the investment strategy to show that it had been considered and THE CLIENT decided not to take it out.
And Gary, the best quote award goes to “Losing an income isn’t always the end of the world…” You must be kidding. Tell that to someone who faces the loss of their home. Next you’ll be telling them that life wasn’t meant to be easy.
There has been research done that suggests for every home lost to fire, 4 are ‘lost’ due to the death of one spouse, and 48 are ‘lost’ due to sickness or accident.
If you’re happy to just get by on Centrelink in the event that you cant work due to illness or accident, good for you. I just hope you don’t have clients that you advise to use any of your “solutions”.
And to finish up, this article was actually about SMSF trustees having to simply include a line that they had considered insurance. That’s it. “The members have considered their insurance needs and (1)have addressed it by putting a Life/TPD policy for $500K in place with AMP OR (2)don’t consider it necessary in their situation/age/etc”. Job done.
Gary you must have your head so far up the proverbial if you believe that to be the case. Lets consider a few of your “solutions”:
Send spouse out to work – she already does in most households. And if they don’t already work, and haven’t worked for some time, where will they get work?
Retrain – into what job? what will that pay compared to current job? how long will that take? what if i’m disabled to the point I cant retrain?
Savings – most people live pay to pay, with little or no savings
Equity – a solution for some, but with no income banks will be reluctant to extend you more debt as you have no way of paying it back. Consumer Credit Law restricts how much extra, if any, they can lend.
Suspend loan pmts – possible, most will give you 3 months holiday. What happens after that?
Centrelink – you can not be serious. If your spouse works, Sickness Allowance cuts out at income above $24K pa.
Ralph, there is so much wrong in the make-up and conduct of that “targeted surveillance” which has been discussed ad nauseum elsewhere that I wont go into it further. It will be interesting to see the comments when ASIC does similar “targeted surveillance” of accountants following the removal of the so-called accountants exemption and the provision of unlicensed financial advice. One wonders if you will be cutting with your comments when its the accounting profession being found to have been breaking the law. Everyone knows that accountants do it now all the time, ASIC simply doesn’t police it to the extent that they should.
#9 Gary Lindsay, I agree that insurance and compulsory super are not always in everyone’s best interest. I disagree with your conclusion that either/both products are “probably not in their best interest”
The legislation “does not make insurance mandatory but does force the trustee to review the insurance arrangements for the fund on a regular basis”
To borrow from #11 Elaine, the hats are different for trustee and member. The trustee, by definition, has a greater responsibility and this is who the legislation applies to(not the member).
Elaine and Gary, you have both clearly considered insurance, with different conclusions due to your own circumstances. To formally document your consideration as trustees would take less time than it did to read this article and post comments (and can easily be done at the same time as executing other annual documents). I can’t see the downside to this law.
From ASIC this morning
“ASIC conducted targeted surveillance of advisers who give personal advice to consumers on life insurance products, finding 37 per cent did not comply with the law”
If more then a third of financial advisers do not know their product and engage in illegal activity, is it any wonder people do not want insurance and should not be forced into an “opt out” system.
Rather then educating the public, perhaps the financial planning industry should educate its members so that they no longer break the law while collecting large fees for doing so.
Jimmy Neutron,
As a professional, I recognise that I’m not licensed to provide advice about insurance.
As a fund Trustee, I believe it is the members responsibility to organise insurance (and seek advice). If they want it in the Fund, then the trustee should arrange it. I realise that in a SMSF the member and the trustee are the same however the hats are different. I have arranged insurance for myself in my SMSF as this was the best option for me. But had I arranged it in my personal name then that is none of my fund’s business, IMO. I also believe Murphy’s Law will operate to ensure that since I have life insurance, I will not die any time soon or if I do, it will be something my policy excludes.
As a side note, most of my clients who have SMSF’s are neither low income nor “young”. Many have insurance. Many don’t require it.
Jimmy – most people have options for replacing income. They can send their partner out to work, retrain, live off savings or equity for a while, suspend loan payments, or in the worst case live of Centrelink (which they pay tax for). Losing an income isn’t always the end of the world and low uptake of income protection insurance outside super proves that.
Most people cannot afford to replace their house if it burns down, since most don’t have enough equity or are at a late stage in life. They still need to live somewhere, plus it’s a requirement from their bank. I insure my car because if I have an at-fault accident with a Mercedes I haven’t got the cash flow to fix it. Comparing building or car insurance and IP insurance is not comparing apples with apples.
You’ve also failed to take on board my point – it should be up to individuals and their lenders to decide what insurance they need based on their tolerance for risk, not you or the government.
TS #7 – I don’t think that compulsory super is in everyone’s best interests. I would be way better off if I could use the money in my super fund to pay off my house. Paying off debt is a risk reducing investment that has a better return after tax than pretty much anything else except geared property. If I had less debt then I also wouldn’t need insurance.
Everyone can make up their own minds about insurance, and if people aren’t flocking towards it without being coerced then it’s not a good investment in their opinion. Maybe the problem is that people need education, in which case the life insurance industry should educate people, or maybe the problem is that the insurance is a waste of time for many people. It’s not for you to say or to mandate.
one wonders Gary if you have your home and car insured. Most people wouldn’t think twice about not insuring their home, but they stand a significantly higher chance of losing their home due to accident, illness or death that interrupts (or stops) their ability to produce an income. Most people will insure their car, despite the fact that the value of the car is significantly less than the value of their ongoing income. As TS said, most people don’t think about these things until its too late. Or they swallow the BS advertising from Union Super funds that getting advice and a solution from a financial adviser will in some way result in a less than optimal outcome for them.
I couldn’t agree less #6 Gary. Unfortunately, most will not even think about insurance, let alone investigate to make an informed decision on its merits unless prompted to do so. (Even less likely if the professional helping establish the SMSF does not understand, discuss or quantify any/all risks associated and potential solutions)
Of course, insurance is not always appropriate (or even available) for all people but it is always appropriate to consider it, especially in the SMSF space. Too many see only cost (of premium) rather than value (of benefit for debt protection, loss of income, liquidity of fund, or survival of the SMSF for all members).
Further, going by your argument superannuation (as a product that people are forced into) in general is ” “probably not in their best interest”. Surely that’s not what you meant?
Jimmy Neutron #5 – if people think that insurance is a good use of their money then they will choose to opt-in to it rather than have to opt-out. If people need to be forced into a product using money that is not from their day to day cashflow and they have to go to effort to get rid of it then the product is probably not in their best interests.
Lets just add to the existing underinsurance problems here, Ralph. Most people have vastly inadequate amounts of insurance cover and you want to make the problem worse. I guess low paid and young people never die, have accidents, become disabled or ill, luckily for them. If there was no automatic levels of cover how many of these people would have insurance? Where then does the burden fall when they resort to government funded benefits?
One would think, Ralph & Elaine, that if you were truly professional, requiring your clients to consider insurance in the investment strategy would be a mandatory part of the process. In the event that a client dies or is disabled, don’t be surprised that their lawyer comes after the ‘trusted professionals’ who provided them with their SMSF advice, but who didn’t think it was important that they consider insurance…
Agree with Tim, it is a ridiculous rule.
Another is the “opt out” insurance option costs lower paid and young employees hundreds if not thousands in fees. As the financial planning industry collects millions in commissions from insurance sales they are quite happy for this to continue. Insurance should be an additional opt in after considering the individual needs of the client, not a blanket way to gouge more fees.
While it might be simple to add a line to the investment strategy, it doesn’t mean that the rule isn’t ridiculous in the first place. I agree with Tim.
[quote name=”Jimmy Neutron”]So just put a line in the investment strategy that says “Insurance is not applicable due to the age of the trustees”. Its been considered and found not applicable. 2 seconds to type that. Easy.[/quote]
Exactly Jimmy Neutron.
And just remember how many accountants have done a half arse job setting up SMSF’s for clients, “helping but not advising” to process their rollovers from their existing supers and loosing all the client life insurances.
Any other minor first world issue to whinge about Tim ?
So just put a line in the investment strategy that says “Insurance is not applicable due to the age of the trustees”. Its been considered and found not applicable. 2 seconds to type that. Easy.