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Why SMSF Insurance Can Be a Gamechanger for Your Super.
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Reasons to Keep Insurance Within Your SMSF
Following the Australian Tax Office (ATO) guidelines, all SMSFs are required to prepare a documented investment strategy during the setup process, including any insurance coverage arranged for its members. Since it’s already part of the foundation, it makes sense to hold insurance within your SMSF. This approach ensures your cover is built into your overall strategy from the start, making it easier to manage and maintain over the long term.
Opting for insurance within your SMSF also offers several advantages. You can customise the type and level of cover to meet each member’s exact needs and adjust the coverage over time as circumstances change.
If you pay for total and permanent disability (TPD) insurance, income protection premiums, and life insurance for SMSF, the fund can claim these costs as tax-deductible expenses. This setup can make the cover more cost-effective for members because it avoids drawing from their cash flow or savings. In the case of life and TPD insurance, it also provides members with tax benefits that are not available with a personal policy.
In this arrangement, the SMSF trustee acts as the policy owner and is responsible for the premium payments. The SMSF member is the insured person.
Holding insurance within your SMSF improves cash flow by using super contributions to pay premiums instead of members’ savings. Even if only one member contributes, all premiums can be covered, with costs allocated to each member’s account in the fund’s records.
Types of SMSF Insurance You Can Arrange
- The property cannot be lived in by trustees, members, or related parties.
- The property cannot be rented to trustees, members, or related parties.
- The property must be purchased at market value.
- The investment must be held solely for the purpose of providing retirement benefits to members.
You can customise your SMSF life insurance policy to suit each member’s needs and adjust factors like waiting periods and sums insured. This can make SMSF insurance more flexible than group cover from retail or industry super funds, though group insurance may sometimes be more cost-effective.
Your fund can also hold SMSF property, audit protection, and trustee insurance. This helps safeguard fund assets, protect against compliance-related legal liability, and preserve the value of property in your portfolio.
setting up a self-managed super fund (SMSF)
SMSF Setup
We ensure your SMSF is fully set up and help identify assets that align with your investment goals and fall within your borrowing capacity.
Insurance Advice
Premium & Tax Management
Investment & Exit Strategy
How SMSF insurance works in the fund
Which SMSF insurance premiums the fund can deduct
An SMSF can claim a deduction for premiums on life cover, any-occupation TPD and income protection, because those align with the fund’s job of providing death and disability benefits under section 295-465 of the tax law. The one that catches people is own-occupation TPD, where only part of the premium is deductible.
Example: the own-occupation TPD trap
The Klein fund insures a member for $500,000 of own-occupation TPD, chosen because it pays out if she can no longer work in her specific profession rather than in any job at all. Because own-occupation cover reaches beyond the super condition of release, only 67% of that premium is deductible to the fund, where any-occupation TPD would be fully deductible. On a $2,000 premium that’s $660 of cost the fund can’t claim, every year, and it’s the kind of thing that gets locked in at setup and never looked at again.
Getting SMSF insurance set up so it stays compliant
For insurance to be valid inside an SMSF, the trustee has to own the policy with the member as the insured person, the cover has to match a super condition of release, which means death, permanent incapacity or temporary incapacity only, and the trustees have to have considered insurance for each member in the fund’s documented investment strategy, which the SIS regulations require.
Example: the cover that can’t sit in the fund
A member wants trauma cover, the kind that pays out on a diagnosis like cancer or a heart attack. Since 1 July 2014 a new SMSF generally can’t hold trauma insurance, because a diagnosis on its own doesn’t meet a condition of release, so the fund would have no way to pay the benefit out. The compliant setup is to hold life, TPD and income protection inside the fund where they align with the rules, and hold trauma cover personally, outside super. The other common setup error is ownership: if the member owns the policy instead of the trustee, the arrangement can fail before it starts.
What happens to the cover, and the fund, when a member dies
When a member dies the trustee has to pay their benefit, including any insurance payout, as soon as practicable, either to a dependant or to the estate, and how it’s taxed depends entirely on who receives it. A benefit paid to a tax dependant such as a spouse is tax-free. A benefit paid to an adult, financially independent child is not, and this is where the insurance itself can quietly make things worse.
Example: why an insurance payout can be taxed for adult children
A member dies with $400,000 in super plus a $600,000 life insurance payout, left to two adult, self-supporting children. Because adult independent children aren’t tax dependants, the taxable portion is taxed in their hands, and here’s the part most people never see coming: because the fund claimed deductions for those insurance premiums, a large part of the payout is treated as an “untaxed element” and taxed at up to 32% including the Medicare levy, against 17% on an ordinary taxable component. On a payout this size that gap runs into the tens of thousands. It’s usually avoidable, but only with planning done before death, not after.
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Deakin, ACT 2600
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Contact
(02) 9788 1850