SMSF Insurance Explained

SMSF Insurance for Members | Understand Insurance within your Super Fund

SMSF Insurance ExplainedInsurance is one of those things in life that is not important until you need it. We all hope when we take out life insurance for SMSF members that it will be a complete waste of money!

It is required when setting up a SMSF to consider if the SMSF should take out insurance cover for each member of the fund. The Trustee of the SMSF must consider the insurance needs of all members and review that as part of the investment strategy regularly. Keep in mind the SMSF insurance requirements are only that the trustee consider whether life insurance through SMSF is appropriate, there no legal requirement under the SMSF insurance rules mandating that it must hold self managed super fund insurance. It is also acceptable for the trustees to decide to obtain insurance cover for one member without it covering all the members.

It is crucial to review your insurance strategy prior to when a member rolls over superannuation balances from other retail or industry funds to ensure existing member insurances are not unnecessarily terminated. 

Purchasing insurance through your SMSF for members can include life insurance with terminal illness or injury, Total and Permanent Disability (also known as permanent incapacity) and Income Protection cover (also known as temporary incapacity). From 1 July 2014 a SMSF may only hold Trauma or critical illness policies and TPD and Income Protection policies, with “own” occupation definition, if the policy was already in existence. 

Furthermore, it is also important to ensure the assets of the SMSF are insured to cover theft, destruction or damage via property insurance policies. Other considerations include audit protection insurance and trustee insurance. The scope of this paper does not include these types of insurances.

Check Existing Insurance Benefits before Purchasing Insurance Policies for SMSFs 

Before implementing a rollover from your retail or industry superannuation fund to your new SMSF you need to check your existing insurance cover.  Most industry funds automatically provide life insurance policies for their members and retail funds typically provide options of insurance for its members. 

Before closing your existing superannuation fund and cancelling any existing insurance policies consider options to continue to hold insurance cover which is already in place or starting new policies held personally or by your new SMSF. 

Retaining existing insurance policies may mean keeping a minimum balance in the old fund to continue the existing TPD and income protection policies as well as life cover. Before applying for insurance in your new SMSF ask yourself if a new insurance policy may be rejected due to a pre-existing health condition or the terms of the new cover may be less generous. Ensure any new insurance product is properly in place prior to cancelling existing insurance policies.

Insurance in SMSF is a significant decision for the members. If you are unsure about your insurance plan we always recommend you chat to a Licensed Financial Planner. 

Why hold insurance within your SMSF?

The following considerations in holding insurance inside by your SMSF include:

  • a SMSF can claim a tax deduction for life, TPD and standard income protection policy premiums – a TPD policy must include “Any” occupation in its definition to be 100% tax deductible
  • flexibility to own insurance with the provider of your choice
  • the policy can be tailored for the individual needs of each member including waiting periods and sums insured
  • cashflow benefits to the member as insurance premiums are paid from the SMSF bank account and allocated to their member balance in the SMSF
  • group insurance may be possible in an SMSF which can reduce the costs of insurance premiums
  • control over who receives insurance proceeds in the event of a member’s death
  • insurance proceeds can be paid directly to a member when an event, such as death or permanent incapacity, occurs provided the definition in the insurance policy aligns to a condition of release under superannuation laws 

Why hold insurance outside your super fund?

The following considerations in holding insurance outside your SMSF include:

  • maintain existing insurance arrangements in your industry or retail fund to ensure you do have insurance coverage as you may not be eligible, due to health or other reasons, to start a new insurance policy
  • total and permanent disability insurance and income protection insurance in relation to “Own” occupation definition is unable to be held by a SMSF unless it was issued prior to 1 July 2014
  • trauma insurance (critical illness) cover is prohibited from being held by a SMSF on or after 1 July 2014 
  • trauma insurance premiums are not tax deductible to a SMSF
  • TPD policies with “Own” occupation definition are only partially tax deductible to a SMSF
  • the risk regarding accessibility of insurance proceeds in the event that something catastrophic occurs is higher if owned by a SMSF e.g. proceeds arising from a trauma event or income protection and TPD events where the policy includes an “Own” occupation definition are retained in the SMSF until a condition of release arises
  • reduction in retirement savings when insurance premiums are paid by the SMSF directly
  • there is an increased likelihood of exceeding contribution limits when insurance premiums are paid by a member and considered as a contribution when the insurance policy is held by the SMSF
  •  life and TPD insurance proceeds paid to an individual, generally, do not attract personal tax but tax can be payable if the policy is held by a SMSF – the insurance proceeds will be tax free to the SMSF but when the payment is made to the member it is a superannuation payment and under certain circumstances personal tax may apply  

What Types of Insurance Policies can a SMSF Trustee hold on behalf of an SMSF Member?

There are four main types of insurance cover, members of your SMSF can consider.

SMSF Life Insurance (Life Cover)

If a member dies a lump sum payment is made to the policy holder which is the SMSF. The insurance payout is tax free to the SMSF.

The trustee will allocate the proceeds to the member’s balance in the fund which is then paid out as a superannuation death benefit and taxed accordingly.

A life insurance policy can also cover terminal illness or injury. To be eligible to make a claim for terminal illness or injury a member must obtain a statement, signed by two registered medical practitioners (one must be a specialist in relation to the terminal condition), stating that the member is likely to die from that illness or injury within 24 months.

Life and TPD benefits are often linked together. 

Total and Permanent Disability (TPD) Insurance (Permanent Incapacity)

The SMSF is only allowed to provide insurance for their members in relation to TPD if the policy relates to “any’ occupation. It is important to clarify the definition of “own” and “any” occupation. 

“Any” occupation is much more broadly defined and essentially means you are unlikely to ever work again.   “Own” occupation is less restrictive, and you may be able to claim the insurance benefits if you can no longer do your pre-injury job and any job within your education, training and experience.  Thus, it may be possible to make a successful TPD claim and then retrain for a job which is outside your education, training and experience.

Tip – A member insurance policy held personally cannot be moved into the SMSF as the fund is prohibited from acquiring an asset from a member of the SMSF.

Insurance proceeds from a successful TPD claim is paid to the SMSF trustee who adds the payout to the members existing balance in the fund.  The trustee must then determine if the member reasonably satisfies the TPD requirements.  If the trustee is satisfied the whole of the member’s superannuation balance is able to be accessed regardless of the member’s age.  The member’s total benefit is now unrestricted non preserved and can be paid out as a lump sum or a pension. Special beneficial tax rules apply. The member can access their super from all funds (not just the SMSF) provided each trustee is satisfied that the member meets the “reasonable test”. 

The Insurer has to be satisfied that the trustee has provided sufficient evidence that the member is permanently incapacitated in accordance with the insurance policy documents before the insurance benefits can be paid.

The SMSF pays the TPD benefit to the member, as requested, when they are reasonably satisfied that the member’s physical or mental health “makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience”. 

Tax concessions are available If a member receives a “disability superannuation benefit.”  The ATO determines eligibility based on whether the member meets the specified definition and has been certified by two qualified medical practitioners.

Consider the evidence required for the three events above.  It may be possible the certification by the qualified medical practitioners satisfies all three. The Superannuation laws only require the trustee to be reasonably satisfied.  The trust deed may include what that is, but it often doesn’t. Best practice would be to obtain the medical certificates as required by the ATO.

Income Protection Insurance (Temporary Incapacity)

The insurance proceeds are paid to the trustee and allocated to the member’s account balance in the fund.  The trustee determines if the member is eligible and determines how much salary is paid to the member.

The member ceases work temporarily due to temporary incapacity such as a car accident where the member has severe injuries and is unable to work for a number of months.  The trustee is able to release member benefits to continue the member’s salary, in part or full, in the form of an income stream but only after sick leave has been exhausted. The income stream is unable to be converted into a lump sum payment.

Unlike TPD a member suffering temporary incapacity is not able to access all of their accrued superannuation balance. Temporary incapacity payments made to a member is taxed as ordinary income as it is not a superannuation benefit payment. 

If the member is eligible for temporary incapacity payments the trustee can pay this from the member’s balance which is not represented by member financed benefits and employer mandated finance benefits (includes SGC). Generally, the trustee will pay the proceeds of the insurance, less payg withholding, to the member.

Trauma Insurance (Critical Illness Cover)

Trauma insurance typically covers critical illnesses such as heart attack, stroke and cancer.

An existing trauma insurance policy held by your super fund that existed prior to 1 July 2014 can be continued.  No new trauma policies can be held by a superannuation fund on or after 1 July 2014.

If the member does make a claim on a trauma police due to suffering a critical illness such as cancer or a heart attack the monies may get stuck in the SMSF and unable to be paid directly to the SMSF member.  The insurance provider will pay the insurance proceeds to the SMSF trustee, but the member may not meet a condition of release such as ceasing work or becoming permanently incapacitated.  The SMSF trustee is unable to pay the benefit to the member unless they meet a condition of release.

Managing Life Insurance Cover in Your SMSF

  • Consider cashflow in the SMSF to pay for life and TPD premiums as well as other member insurances.  Ensure the fund’s bank account has sufficient funds to meet the annual or the monthly insurance payments. 
  • Cost of the insurances for members should be considered and monitored. Group insurance cover is possible in a SMSF and can provide a cheaper insurance option for members.
  • Life Insurance premiums and Income protection premiums and other member insurance premiums made in relation to a SMSF member should be allocated directly to the member’s balance.
  •  If the SMSF member is the insured and has multiple accounts any member insurance premiums should be consistently withdrawn from the same account.
  • Consider which account the premium should be paid from as it can make a significant difference to the tax of insurance proceeds and for estate planning purposes.
  • Ensure the title is in the trustee’s name on account of the SMSF and not in the member’s name personally.
  • The insured person is the member.
  • The insurance policy documents must show the beneficiary as the SMSF to ensure any future insurance proceeds are paid correctly to the SMSF.


Tip – A member insurance policy held personally cannot be moved into the SMSF as the fund is prohibited from acquiring an asset from a member of the SMSF.

Understanding the Tax Implications of SMSF Insurance Premiums

The premium payable for income protection insurance is tax deductible to the holder of the policy despite being owned by the SMSF or if owned personally. Life, and terminal illness and injury insurance premiums, are tax deductible if held by the SMSF but is not tax deductible if held personally. Trauma insurance premiums are not tax deductible. However, a SMSF is unable to take out new insurance for trauma after 1 July 2014. Older TPD policies which include “own” occupation definition are only partially tax deductible.

TPD “any occupation”100% tax deductible
TPD “own occupation”67% tax deductible (standalone policy)
TPD “own occupation”80% tax deductible (bundled with death cover)

Key Takeaways on Policies for SMSF

  • consider how much insurance cover for each member
  • consider the cost of insurance premiums for death and TPD within the SMSF vs outside SMSF
  • owner of the policy should be the SMSF
  • beneficiary should be the SMSF
  • how should the insurance proceeds be allocated and to whom
  • deductibility of insurance premiums
  • consider accessibility to insurance proceeds
  • consider whether to hold insurance cover under the SMSF or personally

Do you need help with your SMSF Insurance ?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about SMSF Insurance? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you need help with your SMSF Insurance ?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF and SMSF Insurance? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us