Insurance within a Self-Managed Super Fund (SMSF)

Insuring via super can also be done within a Self-Managed Super Fund. The insurance held via a SMSF is not owned personally by you, but is owned by the Trustees of your super fund. You may fund the insurance premiums by contributing to super, or by paying the premiums from the balance of your SMSF. In most cases, insurance premiums paid by your SMSF may be claimed as a tax deduction by the fund.

Trustees of a SMSF must act in accordance with the fund’s Trust Deed. Some SMSF Trust Deeds may not allow insurances to be held, and so require amendments to implement the recommended insurance. It is also important to maintain Minutes detailing decisions made that affect the fund’s operations. Trust Deed amendments and the preparation of Minutes may include:

  • ensuring the purpose of the insurance policies is documented,
  • establishing a process for payments,
  • ensuring the required payment options are allowed (such as a Pension), and
  • binding nominations are made (where appropriate).

Critical Illness Insurance within a SMSF

Critical Illness insurance is generally not held within a SMSF as there is no specific condition of release for Critical Illness trigger events. Therefore when a benefit is paid to the fund you may not be able to access the proceeds of the payment.

If you do not meet a condition of release you may have to wait until you reach preservation age and retire (or meet another condition of release) to receive the benefit.

Only people that are in a financially comfortable position, and/or those who are close to reaching (or have reached) preservation age should consider this option.

There are also additional risks associated with holding Critical Illness within a SMSF if the purpose of the policy does not comply with the superannuation ‘sole purpose test’. This could lead to your SMSF becoming non-complying. However the superannuation regulatory authorities have indicated provision of Critical Illness benefits is permissible if you (in your role as Trustees) duly consider certain issues.

As Trustees you must determine whether the provision of Critical Illness insurance by your fund is acceptable, having regard to all the circumstances of the fund and rules of the fund (as set out in the trust deed).

Important matters to be considered and documented include but are not limited to:

  • The design and purpose of the insurance
  • The manner and time in which the trustee intends to distribute any proceeds of the policy
  • The ratio of the premium to contributions being made
  • Issues of ownership of the policy
  • The superannuation benefit payment rules and
  • Taxation issues.