4 Reasons Life Insurance and SMSFs Work Better Together
As from July 2013, it became required by law for all SMSF Trustees to ensure Life insurance is available for all members of their fund. This includes consideration through regular reviews (at least annually) of the fund’s overall investment strategy and also, highlighting the relevance and importance of having Life insurance under superannuation, even though the members are not obligated to take it out.
Why is there a push to bring the two together?, you may be thinking. Many Trustees may have opted for an SMSF facility so they had greater control over their own investment strategy, portfolio and outcomes. In some ways, it may seem to be counterintuitive for them to have to manage and oversee other requirements and other expenses with the payment of premiums for Life insurance.
However, the opportunity for SMSFs is actually in addressing the ongoing underinsurance concerns. Successful retirement planning is essentially about being prepared for anything. Having Life insurance in place will secure each member’s savings and investments should the unfortunate event of death or disability occur to the member, whose spouse and dependents may rely so heavily upon financially.
The gap between SMSFs, including Life insurance (the founding report has revealed that only 13% of SMSF’s include Life insurance 6), means that many Trustees are placing themselves at far greater risk compared with members of other APRA-regulated super funds who have Life insurance readily available to themselves and their members. Not only are uninsured SMSFs at risk, but the Trustees are missing out on a number of advantages.
Following are 4 key reasons why Life insurance within an SMSF works better within the one structure:-
1. Better cash flow
The major benefit and most popular attraction for having Life insurance within superannuation, as opposed to outside of it, is that your basic regular contributions to your super fund (if self-employed) or paid through your employer, will cover the cost of the premiums for the Life insurance. This can assist by taking the pressure off your day to day budgeting, as you don’t need to actually manage these payments as they will be deducted automatically from your superannuation account.
2. Tax benefits
Under superannuation, Life insurance and Total and Permanent Disability insurance (TPD) are generally paid from income that has been taxed at a concessional rate. This would not be the case with these forms of Life insurance if they were maintained outside superannuation under a separate policy.
3. Property protection
If you are investing in property, particularly if through a Limited Recourse Borrowing Arrangement (LRBA), Life insurance is particularly necessary. Without Life insurance in place, an SMSF may be forced to sell other investment assets should a fund member pass away if no Life insurance was available to make payment.
4. You choose
As the policy owner of Life insurance within your SMSF, you can maintain the advantage of choice and also the authority as to whom your Life insurance proceeds are distributed. However there are always ongoing changes to superannuation regulations and policy which the Trustees need to constantly monitor and be aware of.
As always, you should always seek the advice of financial, legal and taxation professionals to assist with your own specific situation.