07 Jan Don’t let an iceberg be the sinking of your financial freedom
Trustees of Self-managed super fund must consider, as part of the fund’s investment strategy and their obligations, “whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund”. There are multiple considerations that as Trustees and members of your SMSF need to think about;
- What insurance do I need?
- How much insurance do you need?
- What is the best way to structure the ownership of the insurance?
- What is the cost insurance?
A critical consideration is usually accessibility, having access to an insurance payment when you need it. To access superannuation benefits, you must have met a condition of release. Commonly triggered conditions are death and total or permanent incapacity. Therefore it is suitable for life and total and permanent disability (TPD) insurance to be held within an SMSF.
Death benefits are simply paid out when a member dies, while TPD can vary. TPD can be classified under “any occupation” and “own occupation,” which limits your cover by the occupation covered. It also limits your accessibility if you hold it within an SMSF.
The “any occupation” definition of TPD meets the requirements under theSuperannuation Industry (Supervision) Act 1993 (SIS) as a condition of release. Any benefit paid into your SMSF can be released from super in the event that you are permanently disabled and unable to perform any form of work, regardless of your employment.
Under the “own occupation” definition of TPD, which does not meet a condition of release and cannot be held in super from the 1st of July 2014. In the instance you had an “own occupation” TPD policy prior to July 2014, you potentially could have a payment for your policy due to not being able to perform your “own” occupation, however you may not access to your insurance payment under own occupation TPD until you have met a condition of release outlined in the SIS Act.
Hopefully, you enjoy a long and happy life such that you do not meet the conditions of being either dead or permanently incapacitated. As we all know – life has its ups and downs. What about covering from loss due to temporary illnesses with trauma insurance and income protection insurance?
Similar to own occupation TPD insurance, trauma insurance and income protection insurance payments cannot be released to the insured member unless the member has met a condition of release. Dependant on your situation, these insurances are more suited to be held outside of the Superannuation environment.
Now that you are aware of which insurance types are suitable for your circumstances in terms of conditions of release, you may then consider funding for your premiums. An advantage in paying your insurance premiums via an SMSF is that they are generally paid with your pre-tax income, and are generally deductible to the SMSF.
The next step is to work out how much you want to be covered for. It is ideal to ensure exactly what you need to avoid under or over-insuring for risks. Statics show that Australian’s are grossly underinsured, with only 30% of the population having sufficient Life cover. A Rice Warner report in 2014 shows that a typical, average income Australian family with two children require $680,000 of Life cover. When in fact they would only have $258,000 of cover.
To work out how much cover you need, a one method is to use the CIMER acronym:
C) Clean-up outstanding bills: the amount required to settle all outstanding bills such as credit cards, bills and funeral costs;
I) Income: an income stream or a lump sum which produces regular income to maintain an adequate standard of living over a number of years;
M) Mortgage: what’s required to pay the balance on your home loan. If you are a property investor, you are also liable for your investment property loans.
E) Education: the present value of the remaining years of children’s schooling years and university costs, and;
R) Retirement: an income stream to support your retirement living or a lump sum adequate to fund income in retirement.
Now you have considered whether insurance is suitable for you, what types of insurance can be held within your SMSF, and how much you should be covered. You can incorporate your insurance consideration as part of your SMSF investment strategy to manage risks over you and your families’ lives, livelihood and lifestyle.