Reviewing life insurance is an important consideration whether it is provided by the SMSF, in another super fund or totally outside super.
In a recent online technical blog, SuperConcepts technical executive manager Graeme Colley said any review must take into account the individual member’s needs as their situation changes over time. This is because the fund’s auditor will check all aspects of the investment strategy as part of the annual audit.
“Even where the fund members do not require insurance, the trustees must review their situation to consider whether they have an appropriate level of insurance. Adequate insurance includes the member’s levels of debt and providing for family members should they die,” he said.
“If it is decided that members should be insured by the SMSF, the type of insurance is limited to cover in the event of the member’s death, total and permanent incapacity, temporary incapacity or terminal medical condition.
“The amount of insurance cover required for a member is something that a trustee may not have the appropriate skills to assess and may like to seek advice from a qualified adviser.”
Mr Colley noted that it is important to review the types of cover that are permitted and it must be consistent with the superannuation conditions of release such as death, disability and terminal illness.
“Most people are familiar with life insurance that covers a person if they were to die. In the event of a member’s death, the proceeds of the policy are paid to the fund and distributed to member’s dependants, their estate or a combination as provided by the fund’s trust deed,” he said.
“The life insurance policy may include the payment of a benefit if the member is terminally ill. Terminal illness means that the member’s prognosis from medical experts is that they are unlikely to live for longer than 24 months.”
When it comes to reviewing invalidity for insurance, Mr Colley reminded that it is possible for a superannuation fund to provide cover for total and permanent disablement (TPD) insurance, as well as temporary disablement insurance, which is usually called salary continuance or income protection insurance.
“TPD insurance usually has specific features depending on the type of policy such as the occupation of the individual being insured and may be referred to as an ‘any occupation’ or ‘own occupation’ policy,” Mr Colley explained.
“An ‘own occupation’ policy will pay benefits if a person is unable to work in their current role. An ‘any occupation’ policy will pay benefits if a person is unable to work in any occupation for which they are qualified by education, training or experience. When it comes to superannuation, the fund is only able to take out ‘any occupation’ insurance on behalf of their members.”
Temporary disablement insurance is designed to cover a person if they are unable to undertake their normal work due to ill health, according to Mr Colley.
This means payments are made after the fund member has met a waiting period and the insurance is paid for a specified period during which the person is unable to work due to ill health.
“The amount paid by the fund for temporary incapacity must not be greater than the income earned by the person prior to the ill health occurring,” he explained.
“Generally, the condition of release under the superannuation rules will usually allow benefits to be paid for temporary illness where the SMSF has a temporary disablement insurance policy in place.”
Reviewing tax circumstances for SMSF
During the review, it will also be important to consider tax circumstances that are present for the SMSF. Premiums paid for insurance are generally tax-deductible to the fund. However, the trustees have an option whether to claim the deduction, according to Mr Colley.
“If a deduction is claimed, the real cost of the insurance premium will be reduced. This is different to individuals who are only permitted to claim tax deductions for salary continuance premiums,” he said.
On the death or disability of the member, any amount received by the fund from the policy is also tax-free. However, Mr Colley noted that depending on the circumstances, insurance benefits paid to members, dependants or their estate may be taxed depending on the recipient, their age and whether the proceeds are paid as a lump sum or income stream.
“Temporary disability benefits are taxable, as they are paid in replacement for the person’s salary during the time they are suffering ill health,” he explained.
“Whether an SMSF decides to take out insurance is a decision to be made by the trustees. However, it must be considered as part of the fund’s investment strategy and reviewed regularly.”
