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Life Insurance for SMSF

Russell Cain Fact Checked Updated: 28 May 2020

When setting up your Self-Managed Super Fund, you are the trustee and thus responsible for everything that happens within the fund. You are legally required to show how you considered life insurance coverage for the fund’s members. You must have documented proof demonstrating what your decision was based on and how it suits the members’ requirements.

The insurance you choose will provide protection for yourself, as trustee, and the members of your SMSF, as well as your respective families.

Think carefully about the type of insurance you purchase and from which company. You might want to request the assistance of an SMSF insurance specialist to help you.

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What is SMSF life insurance?

Life insurance inside SMSF pays a lump sum benefit should you, the trustee or one of your members pass away or be diagnosed with a terminal illness. The fund is the middleman between the life insurance company, the members of the fund and their nominated beneficiaries.

Self-Managed Super Funds do not have a mandatory level of insurance; it’s up to the trustee and its members to decide on the appropriate level of coverage.

The type and level of insurance you’re considering must be documented in your SMSF investment strategy. Please review this document regularly to ensure it continues to meet your members’ requirements during different stages of their lives.

Insurance policies available through SMSF

There are three types of insurance policies you can have inside your self-managed superannuation fund:

Death Benefit

Lump sum amount gets paid out to your nominated beneficiaries if you die or get diagnosed with a terminal illness. If your beneficiary is a non-tax dependent, for example, a child over 18 years old or a business partner, then your payout may be subject to tax.


Pays a lump sum benefit if you are permanently unable to work, because of an illness or injury, in Any occupation – a job which you are reasonably qualified by education, training or experience.

Income Protection insurance in SMSF

When taking out income protection through your super fund, you’ll receive a monthly benefit when you’re defined as temporarily incapacitated due to an accident or sickness. Your payout will generally be taxed at your marginal tax rate on receipt less a 15% rebate.

Trauma insurance that pays a lump sum benefit when you’re diagnosed with one of the critical illnesses listed in your PDS, for example, heart attack or stroke, is not available in a self-managed superannuation fund.

However, your fund could continue to provide you with trauma insurance coverage if the policy is a continuation of a benefit that existed before 1 July 2014.

Pros and cons of insurance held inside your SMSF

Advantages Disadvantages
Premiums are paid from your super account so insurance could be cheaper. Because premiums are paid from your fund, payments could result in a reduction of your retirement savings.
Premiums paid by your fund are entirely tax-deductible to your fund. Benefits could be taxed if paid to beneficiaries that are non-tax dependents.
Own occupation TPD is not available.
Certain income protection benefits might be limited or not available, for example, accommodation benefit.
Benefit payouts could be challenging to access. Claims are subject to the insurer’s policy terms and conditions, members satisfying the conditions of release and compliance from your SMSF trustee.

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Claiming insurance through your super fund

When claiming insurance held inside SMSF, it is typically more restrictive than a personally owned insurance policy. If the insurance company accepts the claim, the benefit will be paid to the fund. After that, the trustee has to decide how the benefit gets released based on the trust deed and whether a condition of release has been met.

Before an insurance benefit from a super fund can be paid, three layers of approval must be met:

  1. The life insurance company’s terms and conditions of what constitutes a valid claim, and
  2. The trustee must check that the rules of the fund allow a benefit to be paid, and
  3. The member must comply with one of the conditions of release as per the Superannuation Industry Supervision (SIS) legislation.

What are the conditions of release according to the ATO?

SMSF insurance rules state that to release a super benefit, before a member has reached their preservation age, the trustee must confirm that the member has met at least one of the conditions of release. For example, they passed away, or are permanently or temporarily incapacitated. After that, the benefit or part of the benefit may be released.

Condition of release for SMSF insurance according to the ATO includes:

Death or diagnosis of a terminal medical condition

Terminal illness is usually defined as the likelihood that a member will pass away within the next 24 months, as confirmed by two legally qualified medical professionals.

Permanent incapacity

A member is unlikely to ever return to Any occupation reasonably suited to them by training, education or experience, because of an accident or ill health. To satisfy your permanent incapacity, you’ll have to provide documentation from 2 registered medical practitioners.

Temporary incapacity

The member will generally receive payment as an income stream if they temporarily stopped working because of physical or mental ill health that is not defined as permanent incapacity.

Termination of gainful employment

The member is no longer employed by an employer who previously contributed to their fund, and their preserved amount is less than $200.

Severe financial hardship

A member is unable to meet reasonable family living expenses and has been receiving relevant government income support of 26 continues weeks (a lump sum no more than $10,000 and no less than $1,000) at the time of their SMSF application; only one payment in any 12 months is permitted. The member must provide evidence of their expenses and debt.

Compassionate grounds

Should a member not have the financial means of paying an expense a super benefit could be released if allowable under the governing rules of the fund.

If your SMSF trustee is not an insurance specialist, you might want to contact a broker to help you.

Frequently asked questions

  • Which insurance premiums are tax deductible to SMSF?

    Generally, the SMSF can claim back life insurance, TPD (any occupation) and income protection premiums as tax deductions. The main advantage of having insurance setup inside your SMSF is that the fund will pay your premiums, which could result in cheaper insurance.
  • Are life insurance policies tax deductible in SMSF?

    When your SMSF is the policy owner of your insurance coverage, the premiums paid for a death benefit are generally tax deductible to the self-managed super fund.
  • Can SMSF pay for my income protection insurance?

    Your fund will typically pay your income protection premiums so you won’t have any out-f-pocket costs. However, these premium payments could result in a reduction in your retirement savings.
  • Are TPD insurance tax deductible in SMSF?

    If your TPD insurance definition aligns with your SMSF’s definition of permanent incapacity, then your TPD premiums may be fully tax-deductible to the fund.
  • Can I transfer my self-owned insurance to my SMSF?

    Life insurance policies held outside of your fund cannot be transferred into your SMSF. Some companies might allow you to cancel your personally owned cover and then re-establish it inside your SMSF; this will then be a brand-new policy.

    However, you always have the option of flexible policy linking or splitting your ownership structure.

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