SMSFs and Insurance – change is on the way
Self-insurance in general and some specific types of external insurance, such as trauma insurance, are to be outlawed in SMSFs and most other super funds.
Over the last 12 to 18 months, the Government has made a few changes in regards to insurance in superannuation funds. Until recently, the two main changes were:
- a reduction in the amount of tax deductions super funds could claim for some disability insurance premiums; and
- a requirement that trustees of SMSFs consider whether insurance cover should be taken out for members of the SMSF.
What is disability insurance?
Disability insurance provides cover to an individual in the event that they are permanently disabled to the extent that they are unable to work.
Regarding the first of those changes, some disability insurance premiums will remain fully tax deductible and others may be partially deductible. The extent of the deductibility depends on the type of disability insurance cover held by the superannuation fund.
The differences in disability cover relate to tests at the time of a disability claim. If the benefits would be payable only if the disabled person is unable to work in any occupation that they have been trained for, then the premiums will be fully tax deductible.
On the other hand, if the benefits could be paid if the disabled person is unable to continue only in the occupation they held at the time of injury or illness, ignoring other jobs they could possibly undertake, then the amount of the tax deduction is reduced.
As that change applied for the year ended 30 June 2012, the firm preparing the accounts for your SMSF should have taken this into account in claiming a deduction for the insurance.
Although a SMSF has always been required to have an investment strategy, one of the recent changes requires that it be reviewed regularly – at least annually.
The more significant change is that, when reviewing the investment strategy, the SMSF trustee(s) should consider whether the members of the fund should be insured or, if they are insured, whether the amount of cover is adequate. It is acceptable if the trustee decides not to take out insurance – but the requirement is that it must be considered.
Because of that change, we are seeing a flurry of activity in replacement of investment strategies and it is important for you to discuss your current SMSF investment strategy with your financial adviser.
Limits on types of insurance
More recently, the Government has introduced further changes, including a limit on the types of insurance cover a fund is permitted to hold.
From 1 July 2014, super funds will only be permitted to obtain insurance cover for members if the benefit can immediately be paid to the member (or their dependants).
Some types of insurance cover have been able to be claimed by the SMSF from the insurer, but limitations on access to superannuation have prevented the benefits being paid to the member. Trauma cover is one such policy which could be paid to the SMSF in the event of a claim but not be accessed by member, possibly until their retirement. Trauma insurance is generally payable in the event of specific events, such as heart attack, certain cancers, loss of limbs and similar occurrences.
Policies for life insurance cover and one of the types of disability cover mentioned previously, where the benefits would be payable only if the disabled person could not work in an occupation they were trained for, would not be affected.
As the changes apply from 1 July 2014 and any cover held in a SMSF before that date can continue to be held by the fund, it is expected that there will be greater focus placed on insurance in a SMSF over the next 12 months, before that particular change applies.
Time for a review?
With a change in the deductibility of some insurance premiums, the need for SMSF trustees to consider insurance for members, and the forthcoming limits on types of insurance able to be held in superannuation funds, now is a good time to review insurance arrangements both in your SMSF and in general. Speak with your financial adviser today.
Source: Topdocs, May 2013