New regulations
Recent changes to Superannuation Industry Supervision (SIS) Regulations mean that trustees of SMSFs now need to ‘consider’ the life insurance needs of their members as part of the investment strategy of the fund. This was introduced in response to the Cooper Review which found that fewer than 13 per cent of the almost 500,000 SMSFs had insurance. Given the important role that insurance plays in the financial planning process, the current levels of underinsurance, as well as the benefits and complexities of holding insurance cover through superannuation, the introduction of these regulations provides an opportunity for accountants and financial advisers to work together and develop a partnership arrangement to review their clients insurance needs.
Next steps
Life insurance can be a valuable safeguard for SMSF clients. Below is a simple checklist to determine whether your SMSF clients would benefit from an insurance review.
- Carry out an asset and liability review with the client.
- Consider life, Total and Permanent Disability and income protection insurance along with other strategies.
- Identify the cover required – this involves determining the types and amounts of insurance cover each member needs and deciding whether that cover should be held within or outside super.
- Select the methodology for allocating premiums and claims proceeds.
- Review the SMSF trust deed to ensure that insurance in the proposed format is permitted.
- Brief the SMSF auditor on your proposal.
- Ensure the statement of advice (SOA) is consistent with other funds documentation.
- Hold a trustee meeting and provide minutes – the trustees should document the reason(s) why the decisions were made. This will provide evidence the new requirement has been addressed.
- Once agreed, ensure that the insurance is properly disclosed in annual member statements
- Review the insurance annually and update it where necessary.
Note, these steps look at the issues relating specifically to the need to include insurance in the investment strategy, and they ignore the other investment strategy requirements in the SIS Act and Regulations.
“Owning life insurance in an SMSF isn’t mandatory. Considering it is.”
Protecting a lifetime of asset
Self-Managed Super Fund (SMSF) clients aspire to an accumulation of wealth after a lifetime of hard work and diligent saving. However, the reality is many clients have their wealth tied up in their SMSF, which in turn carries a number of risks which are not well understood by clients.
As SMSF’s are flexible and tax effective, there has been a huge growth rate in recent years, both in numbers and investments.
Many SMSFs now hold illiquid assets such as fixed property, and also have liabilities such as interest-bearing loans used to acquire these assets. These SMSFs may be at risk of lacking the liquidity to fund death or disability benefits of members. In addition to this liquidity risk, the SMSF may experience difficulties in servicing loan principal plus interest following the death or disability of a member.
Working together
As an accountant, the minutes you prepare for your SMSF clients will need to include the consideration of life insurance. However, conducting an audit of the members’ unique personal circumstances including debts, family requirements, lifestyle planning, medical expenses, spouse employment, and extended family care is not something you as an accountant should have to do.
Each member will have different requirements, with each needing a plan tailored to their specific needs. By recommending your clients discuss these requirements with a life insurance specialist, this will help to determine the personal circumstances of each SMSF member, and specific recommendations can be made to suit the requirements of the SMSF investment strategy and those of the individual members.
The value of insurance
The ultimate aim of any estate planning strategy is to provide clients with the right amount of coverage so that in any event it will provide the right amount to the right people at the time when it’s needed most. If this can be achieved on a tax- effective basis, the end result will be a great value-add for your clients.
It can also be more cost effective to structure insurance through superannuation because of the tax benefits.
The SMSF may be able to claim a tax deduction on the premium costs. In addition, premiums are funded through the superannuation account balance, rather than the member’s own after-tax income. This potentially enables the fund to offset the 15% superannuation contributions tax with the deductible premiums. This approach can significantly reduce the cost of the insurance cover.
Providing you with the right tools
To assist you in helping your clients’ build an appropriate life insurance SMSF strategy and provide a complete risk strategy, PRP has developed a toolkit that includes:
A workshop on Life Insurance Opportunities for SMSF clients
This workshop goes through the numerous strategies that need to be looked at when considering insurance through a super fund.
Specimen Minutes
These have been drafted to assist trustees in the discharge of their obligations, and also to provide evidence that these obligations have been discharged.
- Moving from Accumulation Phase Pension Phase Documentation
- Liquidity and Debt Protection Insurance and Personal Insurance Documentation
- Moving to Reversionary Pension Phase Documentation
More information
For more information on any of these opportunities and how we can work together to provide your clients’ with a complete protection plan, either call or email me directly on the contacts below.
*This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.
