There are plenty of benefits of using an SMSF when it comes to investing your retirement savings, but there are also some benefits with regards to your life insurance.
Life insurance, as well as income protection and TPD insurance, can all be held within an SMSF provided that it is catered for within the trust deed.
Although there are some benefits to holding life insurance within your SMSF, there are also some restrictions that need to be taken into account before you make a decision on how to hold your life insurance.
The restrictions come about through the SIS (Superannuation Industry Superannuation) Act which dictates how and when benefits from a super fund can be released. As any claim from an insurance policy owned by an SMSF is paid into the SMSF, the claim funds are subject to the restrictions.
The restrictions differ between the different types of life insurance, so below we have detailed the types of insurance along with the restrictions and factors that must be taken into account when holding your insurance via your SMSF.
Life Insurance in SMSF
Term life insurance has minimal restrictions when it comes to holding within an SMSF. This is because the SIS Act allows funds to be released to a beneficiary in the event of death or diagnosis of a terminal illness, which is exactly when a life insurance policy will pay out.
TPD Insurance in SMSF
TPD insurance can be held in an SMSF depending on the policy definition. A policy with an ‘any occupation’ definition can be held within a super fund, whilst a policy with an ‘own occupation’ definition cannot.
An any occupation policy will pay out if you become totally and permanently disabled and can no longer perform any occupation which you are suited to, whilst an own occupation policy will pay out if you can no longer perform your own occupation. The first event will trigger a release event for your SMSF, whilst the latter event will not.
Income Protection in SMSF
Most standard income protection policies can be held within an SMSF, however the SIS Act restricts many of the extra benefits included in today’s income protection policies.
Insurance companies have continued to add innovative options and benefits to income protection insurance to make the cover more attractive, however many of these options do not meet the release requirements of an SMSF or any other super fund.
Some insurers have developed new products that have the standard elements of the income protection insurance policy held with a super fund, with the non-SIS Act aligned options held in a separate policy outside the super fund.
By utilising this hybrid style of insurance, policy holders can enjoy the advantages of holding their income protection within their SMSF without having to miss out on the extra benefits that many insurance policies now include.
There is one form of life insurance that cannot be held within an SMSF, and that is trauma insurance – also known as critical illness insurance.
Trauma insurance pays you a lump sum upon diagnosis of a critical illness, however critical illness is not a release condition for an SMSF or another other super fund.
SMSF Insurance Advantages and Disadvantages
One of the major advantages of holding your insurance within your SMSF is the improvement to your cash flow. This allows you to hold the appropriate life insurance whilst maximising your cash flow.
Another advantage of this strategy is that it has the effect of making your life insurance and TPD insurance premiums tax deductible. This is because the contributions made to your SMSF can be tax deductible depending on the type of contribution.
There are a few disadvantages however. The more desirable TPD definition of ‘own occupation’ cannot be held within a super fund, so if you want this TPD definition you won’t be able to use your SMSF. It’s a similar story with some extra income protection benefits.
Another potential disadvantage is that the insurance premiums will be depleting your SMSF balance, however this can easily be countered by making additional super contributions equal to the insurance premiums.
Holding your life insurance within your SMSF can be a good strategy, but as always we recommend that you speak with your financial planner or SMSF professional adviser to determine the strategy that will work best for your own unique situation.