A SMSF.net.au 2012 audit survey showed that approximately one in three non-pension paying SMSFs held insurance in respect of the fund’s members. This represents a small increase over the previous year.
Insurance cover falls into one of four groups:
• Total and Permanent Disability
• Income Protection
The increasing number of SMSFs borrowing to acquire property has resulted in more funds insuring members especially if one is critical to ongoing contributions to the fund. For a couple, this would be the key person in their business. If he/she died or became disabled, the business would either cease or be severely damaged. The business, if it has not done so already, needs to assess its needs in case of such an event.
When a SMSF decides to insure a member to enable debt to be repaid, there are differences to the normal provision of insurance cover to boost a member’s balance. In the usual situation, the insurance premium is deducted from the member’s account and the insurance proceeds are added to the member’s balance. This does not help with the repayment of debt unless the beneficiary or the disabled member elect to take benefits in the form of a pension.
A lump sum benefit would require the insurance proceeds to be paid out of the fund. Even if the beneficiary wanted to leave the proceeds in the fund to repay the debt and commence a pension or income stream, he/she may not be able to do so under the fund’s trust deed. Many trust deeds we have sighted in recent years require benefits to be paid by way of a lump sum if the deceased/disabled member was not in receipt of a pension at the time of death or disablement.
In addition to having insurance cover to boost a member’s benefits, funds with debt to be repaid could establish a reserve account to specifically hold insurance cover in the event of death or disablement of one or more members. Each year an amount equal to the premium payable would be placed into the reserve and used specifically for this purpose. There is some documentation required to put such a reserve in place.
A side effect of using such a reserve is it could also enable an anti-detriment payment to be paid upon death with substantial tax benefits being obtained.
From an audit perspective
Some of the problems the SMSF.net.au team see with insurance policies are:
The policy is held in the name of the insured only whereas it should be in the names of all of the individual trustees or the name of the corporate trustee and it should be held in their capacity as trustee for the fund. Changes to legislation that took effect from August 2012 allow the ATO to impose penalties upon the trustee when assets are not correctly held (insurance policies are considered as fund assets); and
The policy belongs to another superannuation fund. In these cases the policy belongs to a superannuation fund operated by the company issuing the insurance policy. Any amounts paid by the SMSF are roll-overs to the second fund and not tax deductible premiums. And in the event of death payment can be delayed for a lengthy period. The trustee of the insurance company fund has to decide who should receive the proceeds and in the event of a dispute between family members, the Superannuation Complaints Tribunal may make the final decision.
Two final important points to be made about insurance and SMSFs:
From July 2011, a tax deduction is only available for total and permanent disablement insurance where the definition of disablement is an “any occupation” definition. If it is different i.e. “own occupation” then only a partial deduction may be claimable; and
From July 2013, it has been proposed super funds will no longer be able to have trauma insurance cover. Generally, most funds we see do not hold trauma insurance due to difficulties in getting the proceeds out if the client is under preservation age