Are you a member of a Self Managed Superannuation Fund (SMSF)? Do you know someone who is? Read on as the rules relating to SMSFs and insurance have changed and it may be time to seek professional insurance advice.
SMSFs are the fastest growing sector within the superannuation industry with fund numbers approaching 500,000* in Australia. Yet recent Government figures suggest that only 13% of SMSFs have insurance in place.*
This level of underinsurance poses three significant issues for SMSF members, who
are also generally the trustees of the SMSF, namely:
1. Is there adequate protection for family and other members of the SMSF should a death or injury occur, articularly if the SMSF has debt?
2. Are you meeting your regulatory obligations by considering the insurance needs of all SMSF members?
3. Do you have the expertise to identify the appropriate type and level of insurance needed by members, specially if the members of the fund are at different life stages?
Adequate protection
Most industry and large retail superannuation funds provide some form of default insurance cover for members. However, this is not the case with SMSFs. It is essential that members of SMSFs understand the risks associated with not holding sufficient insurance cover in the event of death, disability or an illness or accident that prevents the member from generating an income.
As an example, let’s look at Toby’s situation.
Toby runs his own building business and with his partner, owns a SMSF which holds 100% of his accumulated superannuation. Via his SMSF, Toby has borrowed $300,000 to purchase an investment property and he makes regular superannuation contributions into the SMSF to help meet the loan repayments. Toby currently has no insurance cover.
In this situation, if Toby had an accident and was unable to work, with no income protection insurance, not only would his (and his amily’s) financial position suffer, he would not have the money to contribute to his SMSF to make the loan repayments. As a result, the SMSF may go into a negative cashflow position and assets may need to be sold off at the wrong time to repay debt.
Regulatory obligations
As part of the Stronger Super Reforms, in August 2012, the Government announced that trustees of SMSFs are now required to:
Consider insurance for fund members as part of the fund’s investment strategy.
This requirement does not necessarily mean that insurance must be included in every SMSF but it does mean that the SMSF must have documentation to show that the matter has been appropriately considered and the fund’s auditor will need to sight this documentation or report the fund to the Australian Taxation Office.
This trustee requirement to ‘consider’ insurance needs for all members brings us to the third point;
Insurance expertise
It takes financial planners and insurance professionals many years of training to become experts in the area of insurance. And the raining never stops with ongoing education and regulatory requirement to ensure planners are up to date with the latest laws and trends.
As a consequence, seeking professional advice will be of paramount importance to many SMSF trustees to ensure the insurance needs of fund members have been appropriately considered. Most trustees are unlikely to understand the types of insurance available, the features of each policy, the ownership structures and the varying costs.
Obtaining professional assistance with the management of this SMSF requirement will be a smart move for many trustees.
* Australian Taxation Office – Self Managed Super Funds:
A Statistical Overview 2010-11