Can I get insurance in my SMSF?
Yes, you can choose to get in insurance in your SMSF!
The two major reasons to pay insurance premiums from your SMSF versus personally include:
- premiums can be partially or wholly tax deductible in the SMSF
- cashflow considerations as premiums are paid from the SMSF bank and not your bank account
As part of the fund’s investment strategy a SMSF trustee is obligated to consider whether to hold insurance cover for its members. Keep in mind this consideration does not mean that you are obliged to hold insurance, only to consider whether or not it is the right thing for the members and to document the decision in the SMSF investment strategy.
What are the types of member insurances that can be paid from your SMSF?
- Death (life insurance)
- Terminal illness or injury (examples include advanced cancer, liver failure, congestive heart failure – likely to result in the member’s death within two years)
- Permanent incapacity (TPD – total and permanent disability insurance)
- Temporary incapacity (income protection insurance)
From 1st of July 2014 new trauma insurance policies or new TPD and temporary incapacity policies where the insured person is covered for “own occupation” and not “any occupation” cannot be paid from a SMSF. Trauma, TPD or temporary incapacity with “own occupation” policies existing prior to the cutoff date can continue to be paid.
Can I or my beneficiaries get insurance proceeds out of my SMSF?
It is crucial to view insurance in SMSFs with the potential use scenarios in mind.
Obtaining a tax deduction for insurance premiums which is denied if paid personally is attractive. Using the SMSF’s cash to pay the premiums certainly relieves financial pressures. However, consider what happens to the insurance proceeds if a member dies or becomes permanently incapacitated. How are the benefits paid out and are there any tax consequences?
Trauma proceeds can be an example of bad planning. Whilst a SMSF can still pay the premiums for policies which existed prior to 1st July 2014 the proceeds can be trapped inside the fund. The policy is owned by the SMSF and the proceeds are paid to the SMSF and not the member who has been unfortunate to suffer the trauma. A payment to the member is governed by the superannuation laws and the fund’s trust deed and if the member does not have a condition of release a payment cannot be made.
Life insurance proceeds add to a member’s death benefit which can be paid as a pension (or a lump sum payment.
A lump sum benefit can be paid to an adult child but can have some unfortunate tax consequences. An untaxed element can be created as a result of the insurance proceeds and the adult child could be facing 30% tax on the untaxed component. However, there can be a different outcome if insurance premiums are paid directly from a pension account. Life insurance proceeds add to the pension account and take on the original tax components which can be especially beneficial if the components are 100% tax free. Ultimately, from an estate planning perspective the higher the tax-free component is benefit adult children beneficiaries as they do not pay any personal tax on the tax-free component of the super monies they inherit from their parents SMSF.
Tax Deduction for Insurance Premiums paid from a SMSF
| Policy Type | Held Pre 1/7/2014 | New Post 30/6/2014 | “Own Occupation” | “Any Occupation” | Tax Deductible |
| Death | Yes | Yes | N/A | N/A | Yes |
| Terminal Illness or Injury | Yes | Yes | N/A | N/A | Yes |
| TPD | Yes | No | Yes | N/A | 67% |
| TPD | Yes | No | N/A | Yes | Yes |
| TPD | No | Yes | Unable to provide | Yes | Yes |
| Temporary Incapacity | Yes | No | Yes | Yes | Yes |
| Temporary Incapacity | No | Yes | Unable to provide | Yes | Yes |
| Trauma | Yes | No | N/A | N/A | No |
- A TPD premium is tax deductible if it is wholly or partly in respect of the provision of ‘disability superannuation benefits’ which essentially means the individual suffers from ill-health, mental or physical and 2 legally qualified medical practitioners certify the person is unlikely to work again as a result.
- The ATO allow a percentage of TPD premiums as being tax deductible where the premium is bundled together with other inclusions, is not separately identified and partly or wholly due to the definition above. 67% of TPD “own occupation” is tax deductible. 100% of TPD “any occupation” is tax deductible. 80% of TPD “own occupation” bundled with death cover is tax deductible.
A number of insurers provide TPD policies with the “any occupation” part held and paid by a SMSF whilst the “own occupation” part is held and paid outside of the SMSF.