Insurance

When having a SMSF you need to be properly prepared for any hiccups that may occur along the way.

Most people with an industry or retail super fund have some level of life insurance which is automatically part of the fund. When you have a SMSF though, it is up to the Trustees (you) of the SMSF to apply for insurance themselves. The good news is that life insurance can be included as part of your SMSF. In fact, in August 2012, new regulation was introduced within the Superannuation Industry Supervisions Act (SIS) which now requires all trustees to consider insurance for one or more of the members of the fund.

Do you need life insurance?

To decide whether you need life insurance, simply ask yourself how many people depend on you and your income? If you were to die or become permanently injured, how would the household bills be paid? How would you pay for your mortgage?

Some important facts to consider:

1. 95% of Australian families do not have adequate insurance cover.
2. 1 in 5 families will experience a serious event that could have been covered by life insurance.
3. 1 in 6 women and 1 in 3 men are expected to suffer from disability from the age of 35 to 65, resulting in more than 6 months off work.

^{Source: 2010 National Centre for Social and Economic Modelling – The University of Canberra.}

What types of insurance can be held in SMSFs?

Under the Superannuation law, only certain types of insurance can be held within Super. This includes; Life, Total and Permanent Disablement (TPD), and income protection insurance.

Life Insurance – Life insurance pays your dependents the insured amount in the event of your death or if you become permanently ill. This money can be used to eliminate debt and provide a future source of income for your family.

Total Permanent Disablement Insurance (TPD) – TPD insurance pays you and your family if you become totally and permanently disabled as a result of injury or illness. The lump sum amount can be used to pay off debt, make vital changes to your house, pay ongoing care and medical costs, plus provide a future source of income.

Income Continuation (Income Protection) Insurance – Income Protection is designed to cover you temporarily if you are unable to work due to injury or illness so that you’re able to maintain your day-to-day living expenses during your recovery period.

There are a number of benefits of holding life insurance within your SMSF including;

• By holding insurance within your SMSF you will increase your personal cash flow because your insurance premium is paid by your SMSF, so you no longer have to come up with the money yourself.
• Insurance premiums for Life and TPD insurance are also tax deductible against other income of the super fund.

How much life insurance do you need?

The SMSF Club provides general advice only. To determine the appropriate level of insurance cover you need it is important you speak to a licensed insurance consultant.

Generally though, your life insurance cover should be at a minimum enough to replace your income for 7 years, while also paying off any debt you have.

To determine your insurance needs you need to ask yourself some questions;

• Do you want your SMSF to be debt free?
• Do you want your family to be mortgage free?
• For how many years do you want to provide an income for your family?
• How much income will you and your family need each year?
• Are there school fees that need to be paid?

Your answer to these questions will form the basis of how much life insurance you need.

When it comes to investments, asset classes often operate in cycles of boom times and busts. The ups and downs of managing your super is not just limited to the economy or investment markets though, but also being prepared for personal events that could jeopardise yours and your family’s life in retirement. You should therefore always have a backup plan to protect you and your family, from not just adverse market movements, but also a plan to cover any personal disaster.