Insurance no quick fix for liquidity on death, practitioners warned
Using insurance to pay outstanding property loans on the death of an SMSF member is not the simplistic solution many practitioners believe it is, TAG Financial Services has warned.
Speaking at the SMSF Association national conference in Adelaide, Michelle Griffiths, TAG Financial Services partner of investment advisory and wealth, said some practitioners are under the assumption that obtaining insurance under the member’s name will resolve any issues children or those inheriting illiquid assets may incur upon the member’s death.
“Sounds logical doesn’t it? It sounds like a reasonable thing to do. The problem is the insurance needs to connect back to the member who has passed away,” said Ms Griffiths.
As the proceeds from the insurance are received, this also increases the amount that needs to be paid out.
"So it helps from a cash flow perspective and that might be all you need to do, that might be enough. But all it does is mean you have to pay more out,” she said.
“If you think about it in really simple numbers, if a property is $1 million and you have $500,000 of insurance, for example, that means you’ve now got to pay out $1.5 million.”
You could pay out $1 million to get the property, she said, but you won’t keep the property inside the fund, so “you’ve still got a problem whether you’ve got insurance or not”.
In some cases, Ms Griffiths said the children or those inheriting the assets may need to acquire a loan to “cash up the fund; and then they have cash to pay the death benefit, and then they can pay off the loan, or some of the loan”.