The main purpose of an SMSF is to save for retirement, but insurance matters too, because it protects members and their families if a member dies or becomes disabled. Trustees don't have to hold insurance in the fund, but the law requires them to consider insurance for each member as part of the fund's investment strategy.
Life insurance
Life cover, often held together with total and permanent disability (TPD) cover, pays a lump sum if the member dies, which can then be paid to their dependants. The fund can generally claim a tax deduction for the premiums.
Total and permanent disability (TPD) insurance
TPD cover helps a member meet their financial commitments if they become totally and permanently disabled. The fund can generally claim the premiums too, although for some kinds of TPD cover only part of the premium is deductible.
Income protection
The fund can also hold income protection cover, which pays a regular amount for a time if a member can't work because of illness or injury. Since 1 July 2014, new trauma cover can't be held in super, because it doesn't match the conditions for releasing a member's benefits.
Advantages of insurance in an SMSF
- Trustees can choose cover that suits each member.
- Contributions to the fund can pay the premiums, so they don't come from members' take-home pay.
- A payout can help the member or their family meet debts and living costs.
Downsides
- Cover through an SMSF can cost more than cover through a large retail or industry fund, which can buy at group rates.
- The insurer may ask members for health information or a medical check before it accepts the cover.
If you're a trustee, your accountant or a licensed financial adviser can help you decide what cover your members need.