Self-managed super funds have always been a popular alternative to traditional superannuation to prepare for retirement since they allow trustees and members to take control of their own planning for the future.
But they come with risks you must be aware of. While many industry super funds supply basic levels of Life Insurances as a standard practice, less than 13% of SMSFs have Life Insurance, according to the Australian government’s 2010 Super System Review.
This has prompted recent changes in a SMSF trustee’s insurance obligations for their members under the Stronger Super reforms.
As trustees of a SMSF it’s compulsory you consider an insurance strategy and then review this consideration regularly along with the rest of the investment plan.
Trustees can consider multiple forms of Life Insurance, including Life Cover, Total and Permanent Disability insurance, and Income Protection. Trustees document their considerations in the investment strategy by assessing each member’s needs in terms of age, income, health and dependants. It is expected that the trustee will discuss these considerations with their members and set up insurance if asked to do so.
The Australian Taxation Office (ATO) requires that you have an investment strategy in place that is regularly reviewed and updated to suit the needs of your members. An incorrectly prepared and considered investment strategy can attract penalties from the ATO.
Once you have discussed Life Insurance options with your members, you should research and gather quotes for those members interested in including Life Insurance in their super fund.
Once you have a range of quotes, talk to your members about which policy suits them.
Each policy and insurance provider is different, so you’ll need to arrange with them how the premiums will be paid and in what frequency. Generally, premiums will be deducted from the fund’s account each month, so it will also be your responsibility to ensure there is enough money in the account at the time of withdrawal to ensure the policy doesn’t lapse.
One of your biggest responsibilities as the trustee is to initiate claims on behalf of the deceased or disabled member with the policy provider. You will also need to work with your member or their beneficiaries to put together the relevant evidence to satisfy the claim.
Claims are paid from the insurer into the trustee so it’s the trustee’s responsibility to release the claim in accordance with the conditions set out in the Trust Deed and following superannuation law.
Some older funds may be self-insured, meaning the trustee manages an insurance reserve which members pay premiums into. The trustee can then pay out money from the reserve in the event of death, illness or disability. Self-insured funds were often used by trustees who struggled to obtain traditional insurance due to their age or health.
From January 2015, self-insured funds are no longer allowed in Australia under the government’s Stronger Super changes, and as a trustee you have until July 2016 to transition your fund’s insurance to an industry or retail fund.
A self-managed super fund is a great way to take control of your financial future but it’s a big responsibility with plenty to manage; insurance is just one of those considerations. Remember to always check with a professional, whether it is a lawyer or a financial adviser, if you’re unsure about any aspect of your SMSF.