Types of Insurance Cover
Your SMSF is permitted to arrange the following Insurance Policies for its Members:
1. Life Insurance
2. Total & Permanent Disability Insurance (TPD)
3. Income Protection Insurance
|Type of cover
||What it pays
||Life Insurance provides a lump sum payment to your family on your death or diagnosis of a terminal illness. Life Insurance is available as a policy on its own, or in a policy that includes Linked Total and Permanent Disability Insurance.
|Total & Permanent Disability (TPD) Insurance
||Permanent Disability Insurance provides a lump sum if the insured person suffers Total & Permanent Disablement. Total and Permanent Disability Insurance can be Linked with your Life Insurance Policy or it can be a Standalone Policy.
|Income Protection Insurance
||Income Protection Insurance can provide you with an income in the event that an illness or injury prevents you from engaging in your employment. You can generally insure up to 75% or less of your normal income, payable up to the age of 65, thereby helping you meet your regular financial commitments.
Paying for premiums
All insurance premiums paid by your SMSF are tax deductible. In order for the SMSF to pay for Insurance Premiums, the Insurance Policy Owner must be in the name of SMSF with specified Member named as the Insured person. By using the SMSF Master Insurance Plan, you can be assured that Insurance will be established correctly. This ensures ATO compliance issues and associated penalties are eliminated and that your Insurance Policies are compliant with Super Laws.
Once your insurance application has been approved, the premiums will be paid from the Transaction Bank Account. This allows ESUPERFUND to track the premiums being made and ensure that they are claimed in your SMSF Annual Tax Return. The premiums paid are fully tax deductible to the SMSF providing an effective 15% tax saving and in turn an "effective" reduction in the annual premium. Accordingly if your annual premium is $500 per annum, your SMSF will receive a tax deduction on this payment. Based on the SMSF Tax Rate this will result in a tax saving of $75 annually.
Note that Life and TPD Insurance premiums are not tax deductible in your personal name, but Income Protection Insurance is. The main advantage of having your Income Protection Policy in your SMSF is that the SMSF will pay the Premiums and not you, providing cash flow relief in your daily living expenses.
Tax on your insurance claim
In the unfortunate event that you have to claim on your insurance benefit, the table below explains how each will be taxed and paid.
||How it is taxed
||How and to whom the claim will be paid
||The death benefit is paid to your Beneficiaries in accordance with your Death Benefit Agreement if one is in place. If there is no Death Benefit Agreement in place the Life Insurance claim is paid out at the discretion of the remaining Trustees.
||The TPD benefit can be paid to the Member as a Lump Sum or Pension under the Permanent Incapacity Access Provisions.
|Income Protection cover
||Taxed at 15%
The Income Protection benefit can be paid to the Member as a Pension only under the Temporary Incapacity Access Provisions. The payout is taxed at the Member’s marginal tax rate on receipt less a 15% rebate. This means that the tax on the payout will be the same whether the Income Protection Policy is owned by you or the SMSF. There is no difference.
The main advantage therefore in having your Income Protection Policy owned by your SMSF is that the SMSF will pay the Premiums and not you, providing cash flow relief in the payment of your daily living expenses.
For more on the implications of paying Super Benefits click here