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SMSF Insurance – Its time to review

Understanding Insurance in an SMSF: Life Cover, TPD, and Limited Income Protection

Insurance within a Self-Managed Super Fund (SMSF) can provide crucial financial security, particularly in the areas of life cover, Total and Permanent Disability (TPD), and income protection. Understanding these options is vital for SMSF members who want to safeguard their future and that of their dependents.

Key Points on Insurance in SMSF:

Importance of Life Insurance:

Family Protection: Life insurance is essential for those with dependents. It ensures that family members can maintain their standard of living in the event of the policyholder’s death or inability to work.
Debt Clearance: Besides daily living expenses, life insurance can cover debts such as mortgages and loans, preventing additional financial burdens on dependents.
Inheritance Provision: Even without significant assets, policyholders can leave an inheritance through a life insurance policy by naming dependents as beneficiaries.
Peace of Mind: While money can’t replace a person, life insurance offers financial security and peace of mind in case of unforeseen events.

Types of Cover in SMSF:

  • Life Cover: Pays a set amount upon the policyholder’s death to named beneficiaries
  • Total and Permanent Disability (TPD) Cover: Offers a lump sum for rehabilitation and living costs if the policyholder becomes permanently disabled. It is often bundled with life cover.
  • Income Protection: Covers lost income due to injury or illness, ensuring financial stability during recovery.

When to Consider Life Insurance:

Life insurance should be considered at key life stages such as marriage or having children or a mortgage. Its worth noting that younger individuals are generally in better health, which can result in more favorable premium rates.

Determining the Insurance Amount:

The required insurance amount is often determined based on calculating the following. Factors to consider include existing assets, debts, childcare, education costs, and future financial needs and income. This forms a basis for the amount of cover you will need to apply for.

Additional Considerations:

Funeral Costs: These can be significant, ranging from basic cremation to elaborate burial services. Life insurance can cover these costs, but other options like pre-paid funerals or funeral bonds are also available.

Assessment and Review:

Regularly assess insurance needs against changing life situations. Divorce, Children, Reduced education costs, paying out home loan.  This ensures that the cover remains relevant, affordable and adequate.

Insurance within an SMSF, encompassing life cover, TPD, and income protection, is a crucial component of your SMSF retirement planning. It provides security and peace of mind, ensuring that dependents are financially protected in unforeseen circumstances. SMSF members should carefully consider their individual needs and circumstances when selecting and reviewing their insurance coverage and always seek advice.