Life Insurance for SMSF
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.
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:
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
|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.|
Compare SMSF life insurance policy options
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:
- The life insurance company’s terms and conditions of what constitutes a valid claim, and
- The trustee must check that the rules of the fund allow a benefit to be paid, and
- 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:
If your SMSF trustee is not an insurance specialist, you might want to contact a broker to help you.
Request help for life insurance in SMSF
Frequently asked questions and answers
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.
Want to buy insurance directly?
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NobleOak Direct Life Insurance
Protect your family with Life Insurance and pay on average 20%* less when compared with other insurers. T & Cs apply. Consider the PDS. Issuer is NobleOak Life Limited ABN 85087648708. AFSL 247302.
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