- Self-managed superannuation funds (SMSFs) require trustees to actively manage insurance policies, unlike retail and industry funds where they are typically included automatically.
- The Superannuation Industry (Supervision) Act mandates that SMSF trustees consider insurance as part of the fund's investment strategy to meet regulatory requirements.
- Different insurance types available for SMSFs—Life Insurance, TPD Insurance, and Income Protection—offer various coverage options, tax benefits, and cost determinants based on factors like age, health, occupation, and coverage amount.
- Premiums for insurance within SMSFs can be tax-deductible, making it a potentially cost-effective choice, but costs vary widely depending on individual circumstances and policy features.
Self-managed superannuation funds (SMSFs) offer more control and flexibility over retirement savings, but they also bring added responsibilities, including the option to hold insurance policies within the fund. Many retail and industry funds include these policies automatically, but for an SMSF you’ll need to shop around and add them yourself, as a trustee.
The Superannuation Industry (Supervision) Act 1993 requires SMSF trustees to consider insurance for their members as part of the fund's investment strategy. Including appropriate insurance can help satisfy these obligations and demonstrate the “sole purpose test” of providing retirement benefits for members.
Before making any decisions, consider seeking advice from a financial advisor or SMSF specialist to help navigate the complexities of insurance within an SMSF.
Insurance policies that can be held within an SMSF generally fall into three categories:
1. Life Insurance (Death Cover)
Life insurance, also known as death cover, provides a lump sum payment to beneficiaries in the event of the policyholder's death. It ensures that your loved ones are financially supported and can cover expenses such as outstanding debts, funeral costs, and ongoing living expenses.
Within an SMSF, life insurance premiums are generally tax-deductible, making it a potentially cost-effective option for members.
Cost Range
Life insurance premiums can range from a few hundred dollars to several thousand dollars per year, depending on the coverage amount. For instance, a policy with $500,000 coverage for a healthy 35-year-old non-smoker may cost around $300 to $600 annually, while a similar policy for a 55-year-old could be closer to $1,200 to $2,000 annually.
Cost Determinants
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Age: Older individuals typically face higher premiums due to increased health risks.
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Health: Existing health conditions or a history of serious illness can lead to higher premiums.
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Smoking Status: Smokers often pay significantly more than non-smokers.
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Coverage Amount: Higher coverage levels lead to higher premiums.
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Gender: Some insurers may offer different rates for men and women due to life expectancy differences.
2. Total and Permanent Disability (TPD) Insurance
TPD insurance pays a lump sum if the insured person becomes permanently disabled and is unable to work again. It helps cover rehabilitation costs, ongoing medical expenses, and lifestyle modifications if necessary.
There are two types of TPD cover that can be considered for SMSFs:
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Own Occupation TPD: Provides a payout if the insured can no longer work in their specific occupation.
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Any Occupation TPD: Offers a payout if the insured cannot perform any occupation suited to their training, education, or experience.
Premiums for "Any Occupation" TPD insurance are tax-deductible in an SMSF, while those for "Own Occupation" TPD are only partially deductible.
Cost Range
TPD insurance premiums typically range from $200 to $1,500 per year, depending on coverage and individual circumstances. For "Own Occupation" TPD cover, the costs can be up to 50% higher than for "Any Occupation" cover.
This is because the definition of what renders a worker unable to work under “Own Occupation” are generally broader. In addition, say you worked in a physically-taxing trade, got injured, and were unable to work in that profession, you still might be able to work a desk job, for example.
Cost Determinants
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Occupation Risk Level: High-risk jobs, such as manual labor, attract higher premiums than low-risk occupations like office work.
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Age and Health: Similar to life insurance, older age and pre-existing health conditions can increase costs.
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Coverage Amount: Higher sums insured will result in higher premiums.
In addition, "Own Occupation" TPD insurance is more expensive than "Any Occupation" because it has a broader definition of disability.
3. Income Protection Insurance
Income protection insurance provides monthly payments to replace a portion of your income if you're unable to work due to illness or injury. The coverage typically pays up to 75% of your usual income, helping to cover living expenses during your recovery period.
Premiums for income protection policies held within an SMSF are generally tax-deductible, which may offer a tax advantage compared to holding the policy outside of the fund.
Cost Range
Income protection insurance usually costs between 1% to 3% of the annual income covered. For example, covering an income of $100,000 per year might cost between $1,000 and $3,000 annually.
Cost Determinants
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Benefit Amount and Period: Covering a higher percentage of income or choosing a longer benefit period (e.g., two years vs. until age 65) results in higher premiums.
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Waiting Period: Policies with shorter waiting periods (e.g., 14 days) can be more expensive than those with longer waiting periods (e.g., 90 days).
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Occupation and Risk: High-risk occupations generally incur higher premiums, such as trades, than lower-risk occupations such as office jobs.
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Age, Health, and Smoking Status: Older age, poor health, or smoking history can drive up the cost.
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