Insurance for SMSF members

Insurance cover risk during rollover from super fund to SMSF

Retail or Industry super funds usually offer discounted life and disability insurance as they are underwritten under the group terms. If you were to transfer the existing insurance to your SMSF or buy new insurance, you might not get the same level of coverage because:

  • Your age and health issues can limit your ability to buy a new policy and may increase your premiums.
  • Your occupation or employment might have changed, and this situation may increase your premiums. You may not get the same level of insurance for your new occupation.
  • Your insurance may not be transferable for the same underwritten terms.
  • Your insurance may not be eligible to transfer from the Individual name to SMSF name.

In these instances, it is preferable to continue with your existing insurance, offered by the retail or industry super fund, by maintaining a low balance in your current super fund to cover these insurance premiums.

For any questions about the risk to your insurance coverage, we suggest you speak to an independent SMSF professional before you initiate a rollover.

Insurance details for SMSF members

Super funds usually offer life and disability insurance that is discounted in pricing. However, if you set up an SMSF, you will have to purchase your insurance separately. That said, all SMSF insurances premiums are tax-deductible, and the premiums are paid from the fund. You can tailor the insurance cover to the specific circumstances of the individual members.

While preparing your investment strategy, the trustees are required to consider whether to hold the insurance cover for each member of your SMSF. Your SMSF can generally provide insurance for a member for an event that is consistent with one of below conditions of release of the member's super:

  • Death/Life Cover
  • Terminal medical condition
  • Permanent incapacity (causing the member to cease working permanently)
  • Temporary inability (causing the member to stop working temporarily)
  • Income protection.

Death/Life Cover

Life cover pays a pre-determined amount of money when the insured person passes away or is diagnosed with a terminal illness (that is, unlikely to live beyond 24 months). Beneficiaries in the policy will receive the funds as nominated by the insurer. If there are no beneficiaries (a binding nomination), then a trustee will determine where the money goes.

Total & permanent disability cover (TPD)

TPD insurance will cover if a severe injury or illness makes the member unlikely to work again either in:

  • own occupation, wherein the member can receive a benefit payment; or
  • any occupation, wherein the member is unlikely to receive the benefit payment.

Though each insurance company will have its unique definitions and features depending on the policy it offers, an important feature of the policy is the occupation type. This insurance will help you to cover the costs of any debt repayments, to cover the future cost of living and any rehabilitation costs. To pay the benefit from an SMSF, the trustees must determine and satisfy the condition that the particular member is unlikely to gain any employment due to his injury or illness. Thus SMSFs are limited to holding an eligible 'Any occupation' TPD cover within the fund.

We suggest you speak to an independent SMSF professional to understand the kind of TPD coverage you are getting. We suggest you to ask a lot of questions!

Trauma insurance

Trauma insurance will cover illnesses such as stroke, cancer, coronary bypass and heart attack. The lump-sum amount is paid regardless the insured person ceasing to work or is permanently disabled.

Please note that it is no longer possible to purchase trauma insurance through SMSF unless the policy was taken before 1 July 2014. An SMSF can continue to provide the trauma insurance benefits to the insured member for the policy taken before 1 July 2014. After 1 July 2014, an SMSF generally cannot offer trauma insurance to its members.

Income protection insurance

Income protection insurance (also known as ‘salary continuance’) can provide members with an income to cover regular expenses and few other financial commitments. The money will be provided if an insured member is unable to work for a specified period in the event of illness or injury. Income protection insurance replaces the income lost because of your inability to work due to illness or injury.

Each income protection policy has its definition of disability and range of benefits. Income protection usually offers coverage for up to 75% of your regular income for a specific time.

The information provided in this article is generic. So we suggest you speak to an independent SMSF professional to finalise the insurance requirements of your SMSF based on the personal circumstances of each member.

Related information

Refer to the related knowledge resources: