Addressing insurance needs of SMSF members

When the Cooper Review into superannuation was released in 2010, one of the most notable findings was that less than 13% of SMSFs had life insurance cover.

 

The review recommended that SMSF trustees be required to consider providing insurance for its members and documented the consideration as part of the fund’s investment strategy.

 The SIS Regulations were amended in August 2012 to address this recommendation and took immediate effect. SMSF trustees must now consider whether the fund should hold insurance cover for one or more members of the fund and should be documented as part of the fund’s investment strategy.

 However there is little guidance on what SMSF trustees need to do in order to meet this requirement. This article provides some insight into how this might be done. 

What types of insurance can be considered?

The regulations don’t prescribe the type of insurance that must be considered by the trustee, but it is advisable that this should at least address needs for death, total and permanent disability (TPD) and income protection cover. Trustees are also currently permitted in certain circumstances to take other types of insurance cover such as own occupation TPD or trauma cover, although this will change from 1 July 2014.

What is critical is that the types of insurance considered need to be documented in the fund’s investment strategy.

Understanding the client

It’s critical that any advice provided reflects that there are in fact two clients – clients operating in their capacity as trustees of the SMSF and those same individuals in their capacity as members of the SMSF.

 Recommending that an individual should have a particular type and level of cover and how it should be structured, either held personally or in the SMSF, is personal advice to the individual in their capacity as an SMSF member.

 Advice in relation to the SMSF providing or not providing insurance or how this should be reflected in the investment strategy is personal advice to the individual in their capacity as trustee.  

 The advice provided to the client in their capacity as a member of the SMSF may assist the trustee in making its decision to provide or not provide insurance cover.  Ultimately the decision to have insurance is one for the members of the SMSF.

 Key considerations

1. The investment strategy must demonstrate that the trustee has considered providing insurance to members. This should include how the trustees intend to deal with insurance and reflect what insurance if any, the trustees have put in place. This may also include incorporating any personal member advice as rationale for the trustees’ decision to provide (or not provide) insurance. 
   
2. Make sure that the governing rules of the SMSF allow the trustees to hold insurance for fund members. Beware of any rules that may limit the type of insurance which can be offered, e.g. restricting the term of income protection to two years. Consider any implications about the types of insurance events that the trustee can provide from 1 July 2014 and possible changes to the governing rules.
   
3. Spell out the purpose for which the insurance has been acquired and how the proceeds are to be used. For example, where an SMSF has borrowed to purchase business real property, the primary reason may be to retire debt rather than add to a member’s death or TPD benefit.

 All insurers provide a full features retail offering, but you should also consider whether a simplified solution which provides fast and easy access to the benefits of wholesale group insurance might be more beneficial.

 There’s more than one insurance solution for SMSFs. To find out more contact your financial adviser.

 

Source | AIA