If you ever need to make a claim on your SMSF insurance policy, your main focus will be on getting approved and receiving your payout. But what many SMSF members don’t realize is that accessing those funds isn’t always straightforward.
By understanding how SMSF insurance works ahead of time, you can avoid unnecessary stress during an already challenging time.
Here are some key things you should know:
1. Your SMSF Must Consider Insurance
Superannuation law requires your SMSF to consider whether insurance should be held for its members. This decision must be recorded in the fund’s investment strategy. If you’re unsure whether your SMSF includes insurance, it’s worth checking now rather than later.
2. Your SMSF Must Own the Policy
If your SMSF provides insurance, the policy must be held in the name of the SMSF trustee. You can’t transfer an existing personal insurance policy into your SMSF—it must be a new policy taken out in the fund’s name.
3. Some Types of Insurance Aren’t Allowed in an SMSF
Not all insurance policies can be held within an SMSF. Since July 1, 2014, trauma insurance (which pays out for critical illnesses like cancer or heart attacks) is no longer allowed. Additionally, your SMSF can’t pay for one member’s insurance premiums using another member’s account—each person’s policy must be linked to their own account.
4. SMSF Insurance Premiums Are Allocated to Your SMSF Account
Any insurance premiums paid by the SMSF must be allocated to the insured member’s account. If you have multiple accounts within your SMSF, the trustee can choose which one to use, which may impact tax deductions.
5. Tax Benefits May Apply If You Pass Away or Become Permanently Incapacitated
If an SMSF member passes away or becomes permanently incapacitated before age 65, the SMSF may be eligible for certain tax deductions on the insurance premiums paid. In some cases, this can provide tax benefits for all members who are still in the accumulation phase.
6. Insurance Payouts Are Added to Your SMSF Account
When an insurance payout is received, the funds are added to the SMSF account that was used to pay the premiums. This is important to know when planning how your benefits will be accessed or distributed.
Take Action Now to Avoid Future Stress
Understanding your SMSF insurance now can save you and your loved ones from confusion and delays when it matters most. If you’re unsure about your coverage or how it works, consider reviewing your SMSF’s investment strategy and speaking with a financial adviser to ensure everything is in place.
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