Understanding the Ownership of Insurance Policies Held by a Self-Managed Super Fund: Insurance plays a vital role in safeguarding your SMSF’s assets and the well-being of its members. However, the ownership of insurance policies within an SMSF is a critical aspect that you need to get right.
Ownership of Insurance Policies in an SMSF
Of particular importance is the ownership of the policy itself. An insurance policy is, after all, an asset of the fund, much like other investments held within the SMSF. To maintain compliance with regulations and avoid potential issues, it’s crucial the policy is held in the correct name.
For SMSFs with individual trustees, the insurance policy should be held by “the individuals as trustees for the fund” (e.g. Joe Blogs as Trustee for the Blogs SMSF). Alternatively, for SMSFs with a corporate trustee structure, the policy should be held by “the company as trustee for the fund” (e.g. Blogs Manager Pty Ltd as Trustee for Blogs SMSF). This ensures that the insurance asset is recognised as part of the SMSF’s holdings and that it is managed and protected accordingly.
Avoiding Pitfalls: Paying Premiums for Personally Owned Policies
One common pitfall to be mindful of is when the SMSF pays premiums for a policy that is personally owned by a member. This scenario can lead to several issues:
1. Failure to Exercise Due Diligence: Trustees of the SMSF must exercise the same degree of care, skill, and diligence as an ordinary prudent person when dealing with the assets of the fund. Paying premiums for personally owned policies could be perceived as a failure to meet this standard, potentially exposing the trustee to liability for any resulting losses.
2. Failure to Keep Assets Separate: One fundamental principle of managing an SMSF is the separation of assets between the fund and its members. When an SMSF pays premiums for personally owned policies, it blurs this separation, which may lead to compliance issues.
3. No Benefit for the Fund: If a claim is made on a policy owned personally by a member and admitted by the insurer, the proceeds would be paid directly to the member, not to the SMSF. This means the SMSF has paid premiums for a policy from which it will never recover any proceeds.
4. Potential Breach of Sole Purpose Test: The sole purpose of an SMSF is to provide retirement benefits to its members. Paying premiums on a personally owned policy that benefits an individual member may be considered financial assistance to that member, potentially causing the SMSF to breach the sole purpose test.
To rectify this breach, steps must be taken, including reimbursing the SMSF trustee for premiums paid in respect of the member’s policy. This process can be complex and underscores the importance of ensuring that insurance policies are owned and managed correctly within the SMSF.
Key Questions About Insurance in SMSFs
Now, let’s address some common questions that arise when considering insurance within SMSFs:
1. What insurance do I need for my SMSF?
The type of insurance your SMSF needs depends on its members’ circumstances and financial goals. Common insurance types include life insurance, total and permanent disability (TPD) insurance, and income protection insurance. The choice should align with the fund’s objectives and the protection it seeks to provide its members. Other types of insurance often held by and SMSF include cover for investment properties, artworks or collectables, such as gold jewellery or vehicles.
You can also insurance the fund against liabilities incurred by you acting as Trustee of the fund, for example through SMSF Trustees Liability insurance, or for Audit Protection insurance, which can pay a lump sum to cover to cost of complying with an ATO fund audit.
2. Can a SMSF have insurance?
A question we hope has been answered above. Yes, SMSFs can and often do have insurance. In fact, it’s a valuable component of SMSF planning to ensure members’ financial security in various situations, such as death, disability, or the inability to work due to illness or injury.
3. What insurance is paid by SMSF?
Insurance funds held by the SMSF need to be paid from the funds reserves, which can include premiums for life insurance, TPD insurance, or income protection insurance. These premiums are considered an expense of the fund and are paid from the SMSF’s assets.
4. What insurance is deductible in SMSF?
In most cases, insurance premiums paid by the SMSF are tax-deductible. However, it’s important to ensure that you are correctly claiming deductions and complying with taxation laws.
In conclusion, the ownership of insurance policies held by an SMSF is a critical aspect of fund management. To avoid potential pitfalls and remain compliant with regulations, it’s crucial to ensure that policies are owned correctly by the SMSF, rather than personally by its members. Additionally, when considering insurance for your SMSF, carefully evaluate the type of insurance needed to align with the fund’s goals and consult with an insurance broker to navigate the complexities of insurance within SMSFs. By doing so, you can help secure the financial future of your fund’s members while maintaining compliance with SMSF regulations.