1 Integrity SMSF Education Professionalism Super Guide: A Guide to Personal Risk Insurance for SMSF Trustees Web: Ph:
2 Integrity SMSF Education Professionalism This guide ( Guide ) has been produced by Pty Ltd ( the SMSF Club ) who is a corporate authorised representative of RM Capital Pty Ltd (ABN , AFS Licence No ) and has been prepared for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. The information contained in this Guide may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of The SMSF Club. This Guide does not takes into account your investment objectives, financial situation and particular needs. You should, before deciding whether to invest in any asset class or financial product or service, consider the appropriateness of investing or continuing to invest, having regard to your own objectives, financial situation or needs. strongly recommends that you obtain independent financial, legal and taxation advice before deciding whether to invest. The information contained within this document is of a general nature only. Whilst every care have been taken to ensure the accuracy of the material contained herein at the time of publication neither the author or Licensee will bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Web: Ph:
3 This guide is brought to you by About is a membership program designed specifically for anyone who has or wants a SMSF. Business and investing are team sports. The average investor or small business loses financially because they do not have a team. Instead of a team, they act as individuals who are trampled by very smart teams. Richard Branson With an extensive network throughout Australia, integrates a tailored education program with administrative, compliance, and investment support. We help members throughout every stage of the SMSF process. This includes the establishment of a SMSF, full ongoing bookkeeping, ongoing accounting, legal and compliance support, plus investment education. We ensure our members are informed, responsible, and compliant trustees of their SMSF. Having the right team to support you in meeting your obligations is critical to the success of running your own SMSF. With the guidance of you can be in control of your retirement savings for yourself not by yourself.
4 Integrity SMSF Education Professionalism A Guide to Personal Risk Insurance for SMSF Trustees Of the world s developed nations, Australia ranks as one of the lowest when it comes to Life Insurance cover. Only 5% of Australians have adequate personal risk insurance. Most Australians insure their car, and their house, yet leave their biggest asset unprotected. Why is this the case? Some claim it is due to cost, but as can be seen in the graph below, life insurance costs on average are less than the monthly premium the average Australian spends to insure these lifestyle assets. Yet, the average claim for life insurance is significantly more (average claim for life insurance is over $75,000 yet the average insurance claim for a car is less than $1,000). Doesn t it make more sense to have insurance on your most important asset? That is, your life and future income earning capacity? One of the most important factors which will have the largest impact on your superannuation balance in retirement is your compulsory Superannuation Guarantee (SG) contributions. That is, the 9.5% (increasing to 12%) of your income that is paid by your employer into your nominated superannuation fund. If these contributions suddenly stop, you need to have a safety net to protect your retirement, and to protect your family s future. You may be forced to cut back hours, or stop work altogether as a result of three factors; trauma, total and permanent disablement, or death. To protect you and your family during these times you should consider Personal Risk Insurance. Most Australians with a traditional superannuation fund will usually have some level of personal risk insurance within their fund. When establishing a Self Managed Super Fund ( SMSF ) however, you need to consider applying for insurance yourself. The good news is that you can obtain personal risk insurance within your SMSF. Take up 100% 80% 60% 40% 20% 89% have motor vehicle insurance. A vehicle is stolen every seven minutes in Australia. 87% have contents insurance. In Australia, someone is burgled approximately every minute. 77% have building insurance. Each year there are over 10,000 house fires. 14% have life insurance. One in three men and one in four women will be diagnosed with a cancer in the first 75 years of life. 6% have income protection. Of the working population, one in six men and one in four women are expected to suffer a disability from the age of 35 to 65 that causes a loss of six months or more from work. 5% have TPD protection. Around 1.7 million Australians aged below 65 are living with a physical disability. 2.5% have trauma protection. Two out of five people will suffer a critical illness before they reach 65. $90,000 $72,000 $54,000 $36,000 $18,000 0% Monthly Premium Car Contents Cover Building Cover Life Income Total and Permanent Disability (TPD) Trauma $76.41 $48.55 $47.73 $46.92 $46.33 $10.21 $38.39 $0 Source: Comminsure % of Australian families do not have adequate insurance cover 2. 1 in 5 families will be hit by a serious illness that could have been covered by life insurance 3. 1 in 6 women and 1 in 4 men are expected to suffer from a disability from age 35 to 65 resulting in more than 6 months off work Source; National centre of social and economic modelling (NATSEM) The University of Canberra. Web: Ph:
5 Personal Risk Insurance Requirements for SMSF Trustees In late 2012, the superannuation rules and regulations were amended, requiring SMSF trustees to consider personal risk insurance as part of their SMSF investment strategy. This is a substantial addition to the previous provisions. If SMSF trustees fail to consider these insurance as part of their SMSF investment strategy, they will be deemed in breach of the Superannuation Industry Supervision (SIS) Act. Being non-compliant has serious consequences. For this reason it is important that all SMSF trustees understand the different types of personal risk insurance policies and the impact of holding these inside of an SMSF. As at June 2013, less than 13% of all SMSF trustees held life insurance. Types of Personal Risk Insurance Personal risk insurance usually refers to four types of insurances: Life insurance; Total and Permanent Disablement (TPD) insurance; Income Protection insurance, and Trauma insurance Life Insurance Life insurance pays a lump sum to your beneficiaries in the event of your death. For most Australians, life insurance can be held within an SMSF. The policy is owned by your SMSF, and the premium is paid out of your SMSF, so it doesn t cost you any money upfront or out of your back pocket on an ongoing basis. When deciding on an amount of life cover, it is critical to take into consideration your level of debt. If your lump sum payment covers all of your debt, inside and outside of your SMSF, your family can continue with the investment strategy you have developed and live off the income these investments generate. If you do not have any form of life insurance, your family may be forced to sell assets to cover the debt you have left them with. You need to ensure you have drafted within the SMSF trust deed that in the event of death any proceeds in the fund are to be paid out to your estate. Life insurance premiums are based on your chosen level of cover, occupation, lifestyle choices, health and age. The older you are; the more expensive life insurance is. Total and Permanent Disability insurance (TPD) TPD insurance is often referred to as life insurance for the living. Whilst individuals do not see the payout of an ordinary life insurance policy, the lump sum payout of a TPD policy is transferred to you whilst you re still alive. TPD insurance covers major accidents and illnesses through a lump sum payment, similar to life insurance. TPD could be caused through an accident resulting in the loss of a limb, eyesight, or an illness that permanently prevents you from working. The lump sum payment is designed to help you make the required lifestyle changes, and to pay off debts so you can replace your lost income with income received from your investments. You can use the insurance policy payout to pay off debts so your family does not have to deal with the financial liability of paying off the loan (and the interest). You can also use the payout to cover ongoing bills, which is especially critical if you are the primary income earner for your family. Furthermore, you can use the payout to fund ongoing medical expenses so your partner does not have to take on additional work just to cover these expenses. What is covered under each insurer s list of TPD events varies substantially. You should read the disclosure document to determine what is and what isn t covered before making a decision as to who you should take out a TPD policy with. Like life insurance, TPD insurance is tax deductible where the policy is owned by an SMSF. The policy is not considered tax deductible if taken out in your own name. A TPD payout inside an SMSF also relies on the trustees of the SMSF agreeing to payout to the individual. This condition is just a formality in most cases, but nevertheless a small risk of holding the policy within an SMSF. Generally the trustees of an SMSF are family members; therefore this should not be a problem.
6 Integrity SMSF Education Professionalism Income Protection Insurance For most people under the age of 50, their biggest fi nancial asset is generally their future income capacity. That is, their ability to work. If you are 35 years old, and earning $85,000 a year, you are likely to earn a total of over $2.5 million by the time you turn 65. Your income and the subsequent compulsory superannuation contributions are fundamental to any wealth creation strategy. Most Australians will insure their $40,000 car and pay the $1,000 premium every year without hesitation; however, the same person will never even consider spending the same amount to insure their income. Income protection insurance usually covers up to 75% of your salary for a defi ned period of time (generally between 2-5 years or until a certain age; such as 65). Income protection insurance is the most fl exible type of personal risk insurance and arguably the most important. If you or your husband were no longer able to work, the loss of income is a substantial fi nancial detriment. If you held an investment of which you had entered into a borrowing arrangement, you would eventually be forced to sell that investment as you could no longer service the loans. The loss of income (and the loss of super contributions) will have a substantial impact on your fi nancial situation. Trauma Insurance Today, with advanced medical treatments available, we are living for longer and in many cases living longer with serious illness. The most common of these illnesses include heart attacks, strokes and cancers. Trauma insurance is aimed to provide a lump sum payment to cover all ongoing medical treatment and replace lost income. The main difference between Trauma and TPD insurance is that Trauma cover is designed to cover bills and expenses whilst you recover. However, TPD insurance covers conditions that are viewed as permanent. That is, you are not expected to fully recover from the condition and will face limitations throughout the rest of your life. Trauma insurance is not designed to be held within Super as a payout may not meet superannuation conditions of release, which may lead to payout sums being trapped within your Super. There is generally no tax benefi t for holding Trauma insurance within super. Trauma insurance is the most expensive cover but also the most widely claimed personal insurance. Web: Ph:
7 Should you hold insurance inside or outside of your SMSF? In determining whether or not you should take out insurance policies within your SMSF, you should consider your personal circumstances. For some Australian s who have suffi cient cash fl ow (such as those with professional occupations), holding insurances outside of their SMSF may be a more suitable option. However, individuals facing uncertain cash fl ow, and who have young families or are looking to increase savings outside of super (to buy a home etc.), may consider holding insurance policies within their SMSF as fi nancially favourable. In addition to the deductibility of premiums, consideration needs to be given to the tax treatment on an insurance payout. There are different rules that apply depending on whether the benefi ciary is considered a dependant under SIS legislation. This is especially important when looking at ownership of a Life policy as payment to adult children, where the policy is owned by your SMSF, may result in a tax liability. Where is personal risk insurance normally held Type of insurance Inside super Outside super cover Life Yes Yes TPD Yes Yes Trauma No Yes Income Protection Yes Yes The benefits of having personal risk insurance within your SMSF The main benefi ts of holding Income Protection, Life and TPD Insurance within your SMSF is that the premium paid comes from your super and these premiums are usually tax deductible. Because the insurance premium is paid for using your Super, your personal cash fl ow is improved outside of super, as you no longer have to pay for the cost out of your own back pocket. Premiums for Life Insurance and TPD insurance are generally not tax deductible if held in your personal name. Insurance is complicated and while most is tax deductible inside of your SMSF depending on your position, dependants and age of your children, it may be more benefi cial to hold the insurance in your personal name. It is critical you seek independent advice regarding your own individual insurance requirements.
8 Integrity SMSF Education Professionalism Disadvantages of having Personal Risk Insurances held within your Super Having your personal risk insurances held within your super can pose signifi cant disadvantages for some Australian s. The main three disadvantages have been listed below; 1. Access to the benefit may be restricted. The member of the super fund is required to meet the conditions of release before any Income or lump sum can be paid out, whereas, outside of super, the insured person only has to comply with the terms of the insurance contract. This means under certain circumstances you may be entitled to an insurance pay out, and the amount paid into your SMSF, however as you do not meet a condition or release, you can not gain access to the money as it will be tied up within your super fund. 2. Reduction of your superannuation capital. As your insurance premium is paid from your SMSF, the amount you will have in retirement will be less as the cost for the insurance will erode your retirement savings. To overcome this issue, you should consider making increased contributions to your SMSF to offset the insurance premiums. 3. Tax deductibility of income protection premiums. Income protection insurance premiums are tax deductible when held within Super or in personal names. As you pay a higher tax rate in your personal name than super, the tax benefi t of income protection may be lower when held inside super. The best approach to where you hold personal risk insurance will depend on a variety of reasons relating to you as an Individual. For clients with suffi cient cash fl ow, life insurance outside of super is likely to be a better option. Likewise those clients approaching retirement should be focusing on growing their superannuation not eroding their superannuation savings to fund insurance premiums. Meanwhile, clients with uncertain cash fl ow or who have younger families are looking to increase savings outside of super (such as saving to buy a fi rst home), might be better off using super to fund their insurance needs. Every working Australian has a one in three chance of becoming disabled for more than 3 months before reaching retirement age (Actuaries Australia, 2000). It is for this reason all Australia s need to understand the importance of Insurance, as we are talking about your most important asset your ability to earn an income. Web: Ph:
9 What level of Personal Risk Insurance do you need? When calculating your personal risk insurance needs, you fi rst need to determine what is important to you in the event of your death or impairment. In the event of your Death or Permanent Disablement Do you want to repay the debt on your home loan? $ Do you want to repay any other debt held in your personal capacity? $ Do you want to repay any debt held inside your SMSF? $ Do you want to provide a lump sum to fund alterations to your home, increased medical expenses or home help in the event of your total permanent disablement? Client Partner = Total $ Do you want to provide an annual income for your family? Required Income pa for = Total $ Do you want to provide private education for your family? (eg $10,000 for 10 years = $100,000) Child 1 pa for years = Total $ Child 2 pa for years = Total $ Child 3 pa for years = Total $ Child 4 pa for years = Total $ Total Life/TPD Requirement = $ years Income Protection Insurance Do you require all of your income to fund the current cost of your living expenses? Annual Income to be replaced (client) Annual Income to be replaced (partner) Depending on your personal cash reserves and accrued annual and sick leave, which waiting periods would be best for you? 30 Days 60 Days 90 Days These questions are designed to give you a basic guide as to how to determine the level of protection required. Having calculated a rough fi gure as to your life insurance requirements, you can now seek quotes. The SMSF Club can help you with this process. Please contact our insurance team on to discuss your insurance requirements. Less than 5% of the Australian population holds adequate personal risk insurance as a nation, we are underinsured. Many families have been left in financial ruin because they haven t held adequate cover. For a small premium, which can be paid through your SMSF (excluding Trauma Insurance), and is generally tax deductible, your exposure to these financial problems can be minimised. With the increased responsibilities of being an SMSF trustee, you must not ignore the need for personal risk insurance. These are some of the main questions you need to address when determining what level of Life and TPD cover is appropriate. This list does not include all considerations and does not take into account every aspect of your personal situation. It is important you seek independent fi nancial advice to ensure that you and your family are adequately covered. be a sophisticated investor, be a responsible parent and/or partner. Take out insurance to protect yourself and your family.
10 Integrity SMSF Education Professionalism The Top Six Membership Privileges of 1. Monthly live SMSF online Mentoring workshops provides members with regular monthly education in a webinar format designed specifically to help you learn, grow and protect your SMSF. 2. Quarterly live SMSF seminars across Australia These live events give you the opportunity to network and learn from other passionate, like minded, successful individuals including technical updates, legal and compliance obligations, insurance and investment opportunities. 3. Daily access to a dedicated oneon-one SMSF Head Coach Your dedicated Head SMSF Coach will be your go to for any SMSF questions to ensure you are regularly updated on Super legislation changes, investment opportunities, and general compliance obligations. 4. An entire professional team to support you in all elements of the SMSF process. In addition to your SMSF coach, you will also have an entire team of specialists to support you in all areas of compliance, investing, and wealth protection. These experts include: Stock market specialists An insurance specialist Estate planning Legal and compliance experts SMSF Finance Specialist A Property Coach 5. Access to tailored investments specifically designed for SMSFs members have access to tailored investments specifically designed for SMSF s. From pre negotiated property deals to stock market opportunities such as Initial Public Offerings (IPO s). The bulk buying power The SMSF Club mentoring clients enjoy is one of the greatest advantages of our mentoring program. 6. Full Ongoing accounting and administration* If you do not currently have a trusted relationship with an accountant, gives you access to full SMSF accounting and administration service. This additional service includes: Preparation of financials, lodgement of the tax returns, online reporting 24/7 via your secure login, Mail Box Service, Assistance with rollovers & consolidation making managing the ongoing accounting and compliance of your SMSF stress free. *To become a member it is not compulsory to elect these additional services. Web: Ph:
11 What Can I do now? Opportunity is missed by most because it is dressed in overalls and looks like hard work. Warren Buffett The Next Step is not designed for everyone, nor is it meant to be. provides ongoing education or general advice only. Our aim is to empower our clients with the education so they can make informed, compliant, and hopefully successful investment decisions. Whether you are already a share market investor, have a SMSF or are considering a SMSF, it is critical you understand the obligations of being a trustee of a SMSF and the risks of any investment strategy adopted. If you would like to find out more information about please arrange a complimentary meeting with a SMSF Club coach on or visit our website to register for an upcoming event. An Investment in knowledge pays the highest dividend Benjamin Franklin