Owning life and Total and Permanent Disability (TPD) insurance policies inside a Self-Managed Superannuation Fund (SMSF) offers control and potential tax advantages. However, it’s important to understand both the benefits and considerations of this strategy. Potential Benefits of SMSF-Owned Insurance Tax Deductions on Premiums The SMSF may be able to claim a tax deduction for […]
Owning life and Total and Permanent Disability (TPD) insurance policies inside a Self-Managed Superannuation Fund (SMSF) offers control and potential tax advantages. However, it’s important to understand both the benefits and considerations of this strategy.
Potential Benefits of SMSF-Owned Insurance
- Tax Deductions on Premiums
- The SMSF may be able to claim a tax deduction for insurance premiums paid for certain types of cover.
- Life insurance premiums are generally tax-deductible to the fund.
- TPD insurance premiums may be partially tax-deductible, depending on the type of cover.
- Potential Lower Premiums
- Group insurance policies in a retail or industry fund may offer lower premiums compared to individual retail policies.
- Estate Planning Benefits
- Insurance held within an SMSF can be a tax-effective way to provide for beneficiaries upon death, with less hurdles to be paid out on.
- Flexibility and Control
- SMSF trustees have more control over the insurance policy terms and the choice of insurer compared to retail or industry super funds.
15% Tax Deduction on Premiums
The premiums paid for life and TPD policies (if they meet the “any occupation” definition) are deductible within the SMSF at a rate of 15%, resulting in valuable savings.
Table 1: SMSF vs Personal Insurance Premiums (Tax Impact)
|
Premium Paid |
Personal Insurance (No Tax Deduction) |
SMSF-Owned Insurance (15% Tax Deduction) |
|
$1,000 |
$1,000 (No Tax Deduction) |
$850 (After 15% Deduction) |
|
$5,000 |
$5,000 (No Tax Deduction) |
$4,250 (After 15% Deduction) |
Transferring Insurance Policies to SMSF Ownership
Transferring pre-existing personal insurance into an SMSF enables you to claim the tax deduction. Note that this transfer is not considered a contribution to your SMSF.
Process for Transferring Life or TPD Insurance to an SMSF:
- Policy Assignment: Request the insurer to transfer ownership from personal to SMSF.
- SMSF Pays Premiums: The SMSF will handle future premium payments, which may be deductible at 15%.
- Review Beneficiary Nominations: Update the policy’s beneficiaries within the SMSF to ensure the desired estate planning outcomes.
SMSF vs Retail/Industry Funds
SMSFs differ from retail or industry super funds in terms of insurance ownership and control.
SMSF vs Retail/Industry Fund Insurance Comparison
|
Feature |
SMSF-Owned Insurance |
Retail/Industry Fund Insurance |
|
Policy Owner |
SMSF (Trustees are policyholders) |
Super Fund (e.g., industry/retail provider) |
|
Control Over Policy Terms |
Full control by SMSF trustees |
Limited control by members |
|
Tax Deduction on Premiums |
Yes (15%) |
No tax deduction directly for members |
|
Choice of Insurer |
Flexible |
Limited |
Key Considerations for Trustees
- Ensure the insurance policy complements the SMSF’s investment strategy.
- Verify that the policy passes the sole purpose test, as per super law (section 62) requirements.
- Seek specialist advice when transferring personal policies to an SMSF.
- Consider maintaining group policies if health conditions have changed since initial coverage.
- Consult an adviser for estate planning considerations.
Finally, specialist advice should be sought in transferring personal policies to an SMSF to ensure that all necessary assessments are made, as most industry fund and retail fund cover is issued without a medical assessment and if a member’s health has changed, maintaining these group policies may be more appropriate. The are other estate planning considerations an adviser can assist with as well. This, change can be affected directly with your insurer, without the involvement of My SMSF, as we are not required in this transfer process.
Additional Information
- Section 62 (Sole Purpose Test): Super funds, including SMSFs, must be maintained solely to provide retirement or death benefits, meaning insurance must align with this purpose.
- Regulation 4.07D: Governs the types of insurance policies that can be held in a super fund, primarily life, TPD, and income protection insurance, ensuring they relate to the core benefits the fund provides.
For more information, contact My SMSF or speak to a financial adviser. You may refer to the ATO’s guidelines on SMSF insurance as well.
ADDITIONAL SOURCES:
Contact My SMSF – Contact Us | SMSF Setup, SMSF Accounting and SMSF Loans (mysmsfproperty.com.au)
ATO SMSF Insurance – ATO SMSF Insurance
