SMSF insurance: considering cover for each member

It’s part of the investment strategy

Super law requires every SMSF to have a written investment strategy, put it into practice, and review it regularly. The ATO lists what the strategy should consider: risk and return, how diversified the investments are, how easily assets can be turned into cash, and whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member.

So the obligation is to consider it, member by member. Deciding not to insure someone is a valid outcome, but the fund should be able to show the question was asked and why the trustees decided as they did.

What kinds of cover an SMSF can hold

The cover has to be for an event that matches one of the conditions for releasing that member’s super:

• death
• a terminal medical condition
• permanent or temporary incapacity that stops the member working.

Trauma insurance generally isn’t allowed in an SMSF: the ATO says it doesn’t meet the sole purpose test and doesn’t match a condition of release.

The sole purpose conditions

For a policy to meet the sole purpose test, the ATO sets three conditions:

• any benefit paid under the policy is paid to the SMSF;
• it becomes part of the fund’s assets, at least until the member meets a condition of release; and
• the policy wasn’t taken out to secure some other benefit for someone else, such as a member or a relative.

Premiums

A complying fund can generally claim a tax deduction for premiums on policies that provide death, terminal medical condition, disability or temporary incapacity benefits to members. The amount it can claim is set by the income tax law, so check the details for your fund with your accountant.

What to record, and for how long

Keep the investment strategy and each review of it, including how insurance for the members was considered, for at least 10 years. A useful record says, for each member: which cover was considered, whether the fund holds it (and with which insurer), the amount, when it was looked at, and why the trustees decided as they did. Revisit it whenever the strategy is reviewed: at least yearly, and after the events the ATO says should prompt a review, such as a member joining or leaving the fund, or starting a pension.

How SMSF Cockpit helps, and where it stops

The Insurance Review Log keeps one entry per member per type of cover (life, TPD and income protection): whether it’s held through the fund, the insurer and policy, the sum insured, whether the trustees considered it, when they reviewed it, and the reasons. That gives you a single record to point to at the annual strategy review and to show your auditor, and your accountant can read it with view-only access. The decision itself can also go in the Trustee Minutes Log.

What it doesn’t do: it doesn’t recommend whether to insure or how much cover to hold, it doesn’t compare policies or check that a policy meets the sole purpose test, and it doesn’t track premiums or renewal dates. For those, speak to a licensed adviser.