Self-managed superannuation fund trustees should be reviewing their investment strategy following recent amendments to SMSF requirements in the Superannuation Industry (Supervision) Regulations.

Trustees are now required when reviewing their SMSF investment strategy to “consider” whether or not their fund should carry insurance cover for members. The cover referred to includes life, total and permanent disability insurance and income protection.

Increasingly, financial advisers will need to explain to SMSF clients that failure to do so would be in breach of superannuation legal requirements and could result in the fund being penalised by the Australian Tax Office.

The amendment was driven by concerns that SMSF members don’t have sufficient insurance cover. Having transferred from large funds where automatic cover was generally held, there is concern that the cover is lost in the transfer process.

According to Topdocs, a provider of SMSF, company and trust documentation to accountants, financial planners and dealer groups, it is estimated that fewer than 20 per cent of funds carry insurance cover for their members. This does not include insurance cover held by members individually.

Inside or out?

Topdocs national manager of training and advice, Michael Harkin, told Professional Planner there is no right or wrong answer to the question of cover.

“Rather it’s about what suits individual circumstances. In some situations having insurance within the fund is preferable, while in other situations outside would be a better option.”

However, he claims, the benefits of having it inside super far outweigh the negatives.

“One of the biggest advantages is providing members with cash flow. Because insurance premiums can be paid out of SMSF income, members are seldom out of pocket. This is especially advantageous to those who need all their after-tax income to meet their day-to-day living requirements,” he said.

Another key advantage is that insurance payouts and proceeds are, for the most part, tax effective.

“Where life insurance is concerned, if you have a spouse or tax dependents – that is a dependent under the age of 18 – insurance can be paid as a lump sum free of tax. On the flip side, if the insurance payout goes to beneficiaries who are over the age of 18 and not financially dependent on you, they will be slugged with a 32-per-cent tax bill, including a Medicare levy of 2 per cent.”

Having total disablement insurance inside super means that all proceeds are sitting in a tax-sheltered environment and holders will have an income for life should they suffer permanent disability.

“However, a word of warning: members with disability insurance that stipulates ‘own occupation’ may not qualify for a payout,” said Harkin.

“Additionally, from July 1, 2014, new policies of ‘own occupation’ disability insurance will not be permitted for super funds.”

He added that is not advisable carrying trauma insurance in an SMSF. “Trauma insurance should be kept outside super because super funds can’t pay trauma benefits unless members have met a condition of release – that is, they can legally access their accumulated super,” he said.

“In any event, new policies for trauma insurance will also not be permitted for super funds from July 1, 2014.”

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