What are my life insurance options through a SMSF?

Overview

If you have a self-managed super fund (SMSF), you're not required to purchase life insurance through your fund, but it may be possible.

In fact, the law requires you to consider the life insurance needs of your members.

Whether you've had life insurance through an SMSF before or you're not sure where to start, this guide is for you.

We'll look at the pros and cons of purchasing life insurance through your SMSF and give you a few extra things to consider.

What is an SMSF?

Self-managed super funds are a way to save for your retirement, just like any other type of superannuation.

The difference is that members of SMSFs are also the trustees, who are essentially running the fund for their own benefit.

It's up to fund members to comply with any super or tax laws.

What are my life insurance options through a SMSF?

According to the Australian Taxation Office, insurance through an SMSF can be provided for the following events, which meet the conditions of release for a member's super:

• Death

• Terminal medical condition

• Permanent incapacity

• Temporary incapacity

In general, you can purchase the following life insurance policy types through your SMSF:

• Death cover

• Any occupation total and permanent disability (TPD)

• Standard income protection policies

The following policies are typically not available through an SMSF:

• Own occupation total or permanent disability (TPD)

• Comprehensive income protection policies

• Trauma insurance (unless it is a continuation of benefits for the member that existed prior to 1 July 2014)

These restrictions are in place to protect members, because payouts from these policies can become trapped in a superannuation fund.

The conditions of release would not be met, and therefore the member wouldn't be able to receive the benefits.

Advantages of buying life insurance through a SMSF

There are plenty of benefits to getting your life insurance through your self-managed super fund.

Here are just a few.

Avoid out-of-pocket premiums

Pay for your life insurance premiums by drawing on your superannuation balance.

This frees up your cash for other things while still keeping you covered.

Convenience

Since you're paying your premium through your super, you don't have to worry about paying a bill each month.

Pay premiums with pre-tax money

Since your super is built through pre-taxed income, you'll pay your premiums with money that hasn't been taxed. Bonus!

Protect fund assets

If you've borrowed money from your fund, it could mean a forced sale of assets if you die or are permanently disabled.

An insurance policy will cover that loan, and property owned by the SMSF won't be sold if you can't make the loan payments.

Broader income protection

Income protection policies usually replace 70% of your pre-disability income.

However, if you play by the superannuation rules and purchase the appropriate income protection policy, you could get a full 100% of pre-disability income.

Protect your loved ones

Life insurance through your SMSF ultimately does what life insurance is intended to do: protect your family's finances if something should happen to you.

This offers great peace of mind for many people who choose to have life cover.

Disadvantages of buying life insurance through a SMSF

There are a few drawbacks to buying life insurance through your SMSF that you should keep in mind when making a decision.

Limited product options

As covered earlier, you may not be able to access the full suite of life insurance products when purchasing through your SMSF.

However, this is for your benefit.

Reduced super funds

When you pay your premiums from your SMSF, it could reduce the amount of your super balance.

Super caps

If you try to counteract the reduction of funds by increasing your contributions, be aware of super cap limits.

As of 1 July 2017, all individuals regardless of age are subject to a concessional contributions cap of $25,000.

Payout

Life insurance payouts go to the fund rather than to an individual or family.

This can catch people off guard if they are unaware, so be sure to plan for it when organising your cover.

Check the rules of your fund, because there are also some circumstances where life insurance payouts from an SMSF may be taxed.

How to buy life insurance through a SMSF

Purchasing life insurance through an SMSF can be surprisingly straightforward.

The main caveat is that you need to find a policy that is available in an SMSF version.

Premiums are typically the same as those purchased by individuals outside of a fund.

However, check to see if any exclusions apply in order to meet superannuation requirements.

When you buy a policy for an SMSF, the fund trustees or the trustee company must be listed as the policy owner.

List them "as trustee for" the fund.

Tax considerations for life insurance in an SMSF

Concessional contributions to your super are included in the fund's assessable income, and are viewed as 'tax-advantaged' contributions.

These contributions are taxed at a concessional rate of 15%.

As of 1 July 2017, you can contribute up to $25,000 at the concessional tax rate.

That means you're paying your life insurance premiums from tax-advantaged dollars, saving you money.

An SMSF is typically able to claim a tax deduction for insurance premium costs.

This in turn can lower the tax payable on contributions and investment earnings, which means more money in your pocket.

Is life insurance through a SMSF a good idea for me?

Purchasing life insurance is a very personal decision, and what's right depends on your situation.

Weigh up the pros and cons of life insurance through your SMSF, and be sure to check any exclusions, terms, and conditions so you understand what you're signing up for.

​​The information contained in this guide is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. As such, it is important that you consider the appropriateness of any advice and the relevant product disclosure statement (PDS) before proceeding. Check with a financial professional before making any decisions.