SMSF insurance
Important information: This document has been prepared by CommInsure, a registered business name of The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 AFSL 235035 (CMLA). The information is of a general nature only and does not constitute financial product advice. The information is based on present taxation laws, superannuation laws, social security laws, rulings and their interpretation as at the issue date of this document/brochure. As this advice has been prepared without considering your individual objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances and seek professional advice. The case studies are for illustrative purposes only and should not be considered as specific financial advice. The CommInsure Protection Combined Product Disclosure Statement (PDS) and Policy is available from your financial adviser, by calling 13 1056 or from commbank.com.au and should be considered in making any decision about these products. CMLA is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.
Insurance in SMSFs Since August 2012, the trustee of an SMSF is required to consider insurance cover for members of the fund. The trustee of the entity must formulate, review regularly and give effect to whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund 1. From 1 July 2014, there are other changes on the horizon set to impact SMSF trustees All new insurances issued must be consistent with the SIS conditions of release 2. This has changed the design of benefits like TPD and Income Protection offered in super. 1 Superannuation Industry (supervision) regulations 1994 Reg 4.09 (2)(e) 2 The relevant SIS conditions of release most applicable to insurance in super are: death, terminal illness, permanent incapacity and temporary incapacity.
What do these changes mean for trustees? It may no longer be appropriate for insurance cover designed to be held outside super to be issued to SMSFs, for example Trauma cover, TPD own occupation and income protection extras.
Penalties The recommendation and the trustee s decision to adopt or decline cover, must be reviewed annually and documented in the investment strategy or in the minutes of a trustee meeting. Penalties exist for non-compliant funds. What happens if a trustee fails to address insurance in their SMSF? A person who intentionally or recklessly contravenes this standard is guilty of an offence punishable on conviction by a fine not exceeding 100 penalty units. (Approximately $17,000 for each trustee) (Section 34 SIS Act; Section 4AA Crimes Act 1911) A person who suffers loss or damage may recover... against that other person or against any person involved in the contravention (Section 55(3) SIS Act)
Sample insurance in SMSF Investment strategy The Trustees will consider whether they should hold a contract of insurance that provides insurance cover in respect of one or more members of the fund. In meeting this requirement, the Trustees have regard to the personal circumstances of the members of the fund and other legislative requirements. In considering insurance the Trustees examine the impact on the provision of enhanced death, permanent or temporary incapacity benefits for members, or the provision of liquidity and ability to extinguish liabilities. Refer the attached appendix in respect of insurance policies put in place.
Sample SMSF insurance strategy Appendix 1: Insurance policies The trustees of the fund have determined that it is appropriate to have insurance policies in place for a variety of risk protection objectives. Please tick the boxes based on types of cover in place: A policy of insurance on the life of a member designed to result in a direct increase of the Superannuation Death Benefit paid for the member by the amount of cover purchased. A policy of insurance on the life of a member designed to result in an increase of the Permanent Incapacity Benefit paid by the amount of cover purchased. It was noted that depending on the insurer s definition of Total & Permanent Disability the premium paid may not result in a full tax deduction to the Fund. A policy of insurance for a member designed to result in the Fund s capacity to pay an income stream benefit as the result of temporary incapacity of the member. A policy of insurance on the life of a member designed to result in a capital payment to the Fund. This payment will enable the Fund to extinguish a loan established under a limited recourse borrowing arrangement asset acquisition. A policy of insurance on the life of a member designed to result in a capital payment to the Fund. This payment will enable the Fund to provide liquidity such that the Fund may make an anti detriment payment as part of the Superannuation Death Benefit in respect of the member. A policy of insurance on the life of a member designed to result in a capital payment to the Fund. This payment will enable the Fund to provide liquidity such that the Fund may not be obliged to dispose of an asset to pay the Superannuation Death Benefit in respect of the member.
Benefits of insurance in SMSF $ Cash flow premiums are paid by the super fund with money it already holds, freeing up after-tax income. Tax effectiveness Generally, the insurance premiums are tax deductible to the SMSF providing an effective 15% tax saving which is a significant reduction in the annual premium. Life insurance and Total & Permanent Disability insurance is not tax deductible in your personal name. Clear debt As the prevalence of borrowing inside SMSFs increases, a fund's ability to meet its loan repayments is becoming a far more significant consideration. Pay out benefits to ease financial stress when needed most.
Insurance within SMSFs Life Insurance Company Issues a life insurance policy to SMSF Following a claim, insurance proceeds paid to the SMSF SMSF owns the policy and makes premium payments from funds assets SMSF SMSF will pay proceeds to the member or beneficiary(s) as and when appropriate Member contributions are typically made to meet the premium payments Member / Beneficiaries
SMSF insurance can be complex Some of the things trustees need to know include: what cover is needed the right level of cover the most appropriate structure to house the policy the most cost effective way of funding the insurance
CommInsure s purpose-built SMSF plan Designed to make your job easier. How? 1. The SMSF Plan has been designed with a view to provide SIS-compliant insurance cover to SMSFs - SMSF trustees can have peace of mind that their members are more likely to meet a SIS Act condition of release and receive the benefit. 2. It s flexible the SMSF Plan can be tailored to suit all members utilising CommInsure s Split TPD and Flexi-linking. 3. The SMSF Plan is potentially cost and tax effective not only does insurance inside super free up day to day income, but premiums paid by a SMSF may be tax deductible to the fund.
CommInsure SMSF Plan Core cover options* Life Care TPD^ Income protection Essential Cover What can I add? TPD Income protection Essential Cover TDP * These can be taken as stand-alone cover or as the combination/s shown. Accidental Death ^ TPD can be held on a stand-alone basis within the SMSF Plan.
Tools for your use: Product summaries
Compelling reasons to say yes to insurance yes yes It doesn t matter how fantastic a person s investment strategy is, without protection of this investment it could be all for nothing. Research shows that 60% of families with dependent children do not have enough insurance to cover the household expenses for a year if the family bread winner were to die 1. Or the chance of falling seriously ill are higher than you probably think. Two in five males and one in four females will suffer a critical illness between the ages of 30 and 64 2. In 2013, CommInsure paid more than $665 million in life and disability claims to over 10,000 customers and their families. That s over $12 million every week. 3 1 IFSA/TNS Protection Gap research 2005 2 General Cologne Life Re Australia, 2002. 3 CommInsure claims 2013, Retail and Group statistics combined
Case study: Business Partners, Bill and Tom Bill and Tom are unrelated business partners and have set up a SMSF which owns their business property which is leased back to the property. They each have 50:50 entitlement to the assets within their SMSF. Property valued at $800,000 Loan on property of $400,000 If either partner was to pass away or become TPD, insurance cover could enable the SMSF to: Pay out the $400,000 debt Pay the estate/outgoing owner to the amount of the SMSF holding Allow the continuing owner to take full ownership of the SMSF assets so they do not lose the business
Case study: Business Partners, Bill and Tom The Insurance solution: Tom and Bill took out cover for $1.2 million to cover the value of the property and the debt so that both parties would be adequately compensated should the need arise. Mortgage Insurance Value of business on property real property proceeds = $800,000 $1.2million Value of business real property $800,000 $400,000 Net assets of fund $1.6million Should something happen to either party, both Tom and Bill s proportion would be $800,000. For TPD benefits, the claimant may be able to receive his TPD benefit as either a pension or a lump sum which offers more flexibility.
Case study assumptions: Business Partners, Bill and Tom Net equity for Tom is $200,000 (($800,000-$400,000)/2) and for Bill is $200,000 (($800,000- $400,000)/2). This assumes that all insurances are owned by the trustee of the SMSF and uses a combination crossownership and self-ownership strategy. Each member will have $600,000 of life insurance on their own life, that will be credited to their own account in the event of death or TPD (tax deductible to the fund). Each member will have $600,000 of life insurance on the other member s life, that will be credited to non-life insured s account in the event of death or TPD (non-tax deductible to the fund). Upon death or TPD of either member, $600,000 will get credited to each members account. The non-life insured member, will then pay off the mortgage ($400,000), and transfer $200,000 to the life insured member s account in lieu of equity in the business real property. The life insured will then have $200,000 of original equity in cash, plus the additional $600,000 in insurance proceeds ($800,000 in total benefits). The death benefit or TPD benefit is paid out as a lump sum of $800,000 (less applicable taxes). The only remaining asset after the lump sum death benefits are paid, is the business real property valued at $800,000. Please note, the trust deed must allow the cross ownership of insurance proceeds, and the payment of TPD benefits, for this strategy to work.
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