SMSFs warned on traps with insurance set up
For SMSFs setting up insurance cover inside super, getting the ownership of the policy right is critical, a technical expert has cautioned.
In a recent online article, Heffron senior SMSF technical specialist Annie Dawson explained that where the trustee of an SMSF decides to offer insurance cover to members, it's critical the policy is set up correctly from beginning.
“Of particular importance is the ownership of the policy. An insurance policy is, after all, an asset of the fund,” said Ms Dawson speaking ahead of the Heffron Super Intensive Day.
“Like other fund investments, an insurance policy held for an SMSF should be held by ‘the individuals as trustees for the fund’ in cases where the fund has individual trustees or held by ‘the company as trustee for the fund’ in cases where the fund has a corporate trustee.”
Ms Dawson warned that if an SMSF pays premiums in respect of a policy that is owned personally by a member, the trustee will have failed to exercise the same degree of care, skill, and diligence as an ordinary prudent person when dealing with the assets of the fund.
“[They may also] be potentially liable for any losses caused,” she added.
“They may have also failed to keep the assets of the SMSF separate from any assets held personally by the trustee.”
This also means that the fund has maintained a policy for which the fund will not receive a benefit.
“If a claim were made and admitted by the insurer, the proceeds would be paid to the member personally, not the SMSF — the SMSF has paid premiums on a policy for which it will never recover any proceeds,” she explained.
“This may be considered financial assistance to the member and cause the fund to breach the sole purpose test.”
Where this has happened, Ms Dawson said steps for rectifying this breach include reimbursing the SMSF trustee for premiums paid in respect of the member’s policy.
Ms Dawson noted that there is a range of other issues that trustees should consider when determining whether to hold or maintain an insurance policy inside super.
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
