SMSF Investment Strategy - Life InsuranceDid you know that if you have never thought of, purchased or at least mentioned life insurance in minutes for your SMSF, you are probably a non-complying superannuation fund!

Recent changes to the Superannuation Industry (Supervision) Regulations 1994 now require SMSF trustees to consider the life insurance requirements of its members as part of the SMSF investment strategy of the fund in order to continue fulfilling their obligations of running the SMSF.

The recently amended Regulation 4.09 (2)(e) affecting an SMSF investment strategy states;

‘The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following … (e) for a self managed superannuation fund–whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.’

As an SMSF trustee, you need to review your investment strategy annually. With the changes, you now also need to include life insurance as part of your annual investment strategy review. This aligns SMSF’s with the way that normal superannuation funds offer insurance to their members. With the need to ‘review regularly’ SMSF trustees need to revisit their investment and insurance strategies when the circumstances of the members change and also on a periodic basis.

There is no set figure to the level of insurance that a SMSF needs to consider for its members, however as per the sole purpose test for superannuation, the fund needs to provide for the death or disablement of its members in addition to retirement as part of its core operation and as such consideration needs to be given to TPD Insurance along with Life Insurance.

The new regulations do not stipulate that SMSFs have to hold life insurance or TPD insurance for members, but rather needs to have ‘regard to the personal circumstances’ of the members. If a member is already adequately insured outside of the SMSF then insurance may not be required (although it could be more tax effective to hold that insurance within the SMSF).

MoneyGeek Fact: Property is a popular investment choice in SMSF’s which requires holding large values of illiquid direct property assets. On the death or disablement of a member, the SMSF may not be able to sell, or may not want to sell properties to discharge member benefits. Life Insurance and TPD Insurance can provide a means of providing liquidity to SMSF’s by providing a facility to provide a lump sum to members when required.

Is my SMSF Investment Strategy at risk by not taking Life and TPD Insurance?

The change in regulations raises interesting questions and potential additional liabilities against trustees. If a claim event occurs (i.e. Death or Disablement) and a member (or members dependant / beneficiary) feels that the trustees did not adequately consider the personal circumstances of each member when deciding to hold a contract for insurance, the trustees and fund may be held liable for inadequate insurance provided or offered.

Any decision to hold or not to hold a contract for life insurance and/or TPD insurance within the SMSF needs to be considered against any other insurance policies that the members hold along with the overall strategy of the SMSF, the cost of premiums and the relation of that policy to specifically contributing to the retirement, death or disablement of a particular member.

As with any SMSF trustee decision, all decisions and review decisions need to be adequately recorded in SMSF minutes.

What are personal circumstances? How do I determine what life insurance the SMSF Investment Strategy needs for its members?

Determining what the personal circumstances of a member can include a range of concerns including debts, family planning requirements, lifestyle requirements, potential medical expenses, care and spouse employment considerations to name a few. Not everyone is the same and it is likely that the requirements of each member will differ.

Want to compare Life Insurance for your SMSF?

MoneyGeek wants to make sure our readers get easy to understand information to assist make the right financial decisions. Hand in hand with knowledge is advice – MoneyGeek has teamed up with Keyperson Insurance to provide Life Insurance quote comparisons and advice. For trusted, confidential and individualised advice, complete and enquiry and an experienced adviser from Keyperson Insurance will be in contact to discuss your details.

About the Author – Benjamin Irons

Benjamin Irons

Benjamin has been involved in the financial services industry since 2004. Benjamin has a Bachelor in Business, Diploma of Financial Services (Financial Planning). Previously a Financial Adviser and a business owner, Benjamin has worked with hundreds of individuals and businesses to implement simple strategies to improve wealth. Benjamin writes for a number of websites to assist people take control of their finances and find their financial freedom!

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