SMSF STRATEGY GUIDE
INSURANCE IN A SMSF
A significant issue for SMSF members is the ability to use the superannuation environment to fund their personal insurance needs. However, it is important to understand that not all insurances are able to be funded (and owned) by your SMSF.
Note that for a number of years now, it has been an actual requirement that as part of your written investment strategy, the trustees need to consider the need for insurance for all members of the fund. This doesn't mean everyone has to have it, but it does need to be considered.
WHAT INSURANCE IS ALLOWED IN A SMSF
So lets look at what types of insurance are allowable inside a SMSF, and what is the tax deductibility situation for each.
First one is Life insurance. Yes, this is certainly allowed in a SMSF, and yes the premiums are fully tax deductible for the fund. This is one of the advantages of super whereas life insurance obtained in your own name is not tax deductible at all.
Total and Permanent Disablement Insurance (TPD)
TPD, or total and permanent disablement insurance is allowable in your SMSF and is tax deductible, however note that for new policies from 1 July 2014, you can only take out “any occupation” TPD policies, not “own occupation” TPD policies.
Note that older existing 'own occupation' policies prior to that date can be retained, however the premiums are only partly tax deductible to the fund.
If you want 'own occupation' TPD, note that many insurers now offer what are known as split TPD policies, whereby the 'any occupation' part of the policy is paid by the super fund, but the ‘own occupation’ part is paid by you personally.
Income Protection policies are also allowed in a SMSF, and are fully tax deductible to the fund. Note that these policies are also deductible at your marginal tax rate if paid personally, so you may not want it in your SMSF purely from a tax perspective, but perhaps you may from a personal cashflow perspective.
New trauma policies however are not allowed in SMSFs since 1 July 2014. Older existing policies can remain, however they should be reviewed with the view to getting cover outside of your SMSF. The problem with Trauma policies is that if a claim event occurs, the SMSF as the fund owner may claim, however you may not be able to get the money out of the fund due to not meeting a condition of release.