One of the key benefits with other superannuation funds is automatic insurance covers. It is a real danger if you forgot about the insurance component when setting up an SMSF.
Most industry funds have automatic life and total disability cover and it is important that you are covered by an alternative cover before cancelling your current fund or you may find that you will be uncovered for a period of time. And if you have health issues, you may not be able to get the same insurance cover elsewhere.
It would be wise to check your current insurance cover and determine if you would like to keep the cover or arrange for an alternative cover before cancelling or withdrawing from your current fund to your SMSF.
There are 4 types of insurances that can be taken out via your SMSF:
1. Life Insurance
Life insurance pays a lump sum in the event of death.
2. Total and Permanent Disability Insurance
Total and permanent disability insurance pays a lump sum in the event of permanent disability.
3. Income Protection Insurance
Income protection insurance (or salary continuance) pays an income in the event of an accident or illness that results in you being unable to work.
4. Trauma Insurance
Trauma insurance pays a lump sum when you suffer a traumatic event. For example, cancer, heart attack and other debilitating events.
There are pros and cons to taking out an insurance cover via your SMSF or superannuation fund.
- Tax efficiency if you are paying the premiums of the insurance from your contributions that may come frm your pre-tax income thus effectively getting you a tax deduction for your premiums.
- There is no impact on your personal cash flow as it is being funded by your superannuation fund.
- The taxation in the event of a payout to non-dependents is a lot more. For example, a payout of a life insurance policy doesn’t attract tax no matter who it is paid to if it was funded outside of super. However, if a payout goes to a non-dependent from a superannuation funded policy, it can attract up to 30% tax plus Medicare and temporary deficit levies.
It is not necessary to have insurance in your SMSF. However it is a requirement for Trustee of an SMSF to consider whether to hold insurance for members of the fund when developing your fund’s investment strategy.
If you are unsure of what sort of insurance cover you or your members in your SMSF may need, it is highly recommended that you seek advice from a financial planner.
[Photo credit: Alan Cleaver (Flickr Creative Commons)]