SMSFs need insuring… or do they?

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Despite legislation being introduced late last year in an attempt to boost the life insurance quota of SMSFs, hundreds of thousands of Australians managing their own super continue to risk their retirement nest-egg. The legislation was introduced in response to the Cooper Review, which found that fewer than 13% of SMSFs had insurance. It required trustees of SMSFs to indicate that they’ve considered life insurance for members of the fund.

SPAA’s Graeme Colley says the main reason a fund or member may not have insurance depends on the cost of premiums which are more expensive for older members.  “It should be remembered that the average and median ages of members [is] in the 50s, which is a time when insurance becomes inordinately expensive.”

Advisers need to consider a number of factors when considering life insurance within an SMSF, including the age of the members, health and personal debts, and the adequacy of insurance the person has outside the superannuation fun.

“Another reason for insuring outside superannuation is that members may be able to access cheaper insurance in other superannuation funds which provide group rates and do not require the same levels of underwriting than if the policy was taken out in the SMSF,” says Colley. He says advisers can increase the level of insurance by examining the client’s whole circumstances to see whether it is warranted.

“Don’t forget insurance is designed to put those we leave behind in the same or similar circumstance as if we had continued working or received income in retirement.”

According to Sam Kitchen, senior advisor at William Buck chartered accountants and advisers, many clients continue to overlook insurance either through a lack of understanding or lack of interest.

“We have a situation where people are running their own successful investment strategy and suddenly they’re being asked to consider insurance,” he says. “In practice, most clients we see don’t have the desire to learn about insurance. They’ll talk about their dividend yield on shares, but I don’t hear them talking about permanent disability.

He says that most SMSF members have carefully planned their investments and many feel they have no need for insurance, but that doesn’t mean they’re going to be protected if the unexpected happens.

The legislation was also creating a lot of unintended consequences, such as leading some to consider insurance when it’s of no benefit to them. “I was asked by an 82-year old about taking out a policy within his SMSF,” said Kitchen. “This would have cost the pensioner tens of thousands of dollars a year. Forcing a pensioner without dependents to pay for insurance is not in the spirit of the legislation. Thankfully, we were able to set him straight.”

  • Nick Hatherly, AFRM on 21/02/2013 11:33:34 AM

    Thanks for the response Sue. You are very correct. I also want to point out that insurance is not an off the shelf product. It is a contract with definitions and requires careful consideration to ensure that they meet the clients circumstances. Very few people in my experience have any idea on what is needed and what is avialble for that matter. The suggestion that you just go and join an industry fund to get cheap insurance is not a considered approach and downplays the advice that the public need to ensure that their futures and that of their families, are secure. Granted, something is better than nothing, but the adviser is very relevent in the education process. Sam noted clients disinterest in his comments. We need to raise that awareness of need to them. Otherwise, who is going to take responsibility when everything falls apart. I'd think the SMSF adviser, possibly even the SMSF auditor or administrator, may end up negligent and in the firing line. A bad result for everyone and the industry as a whole.

  • Wayne Leggett on 20/02/2013 1:14:30 PM

    Er, Sam, I suggest you rethink your comments. It won't cost an 82 year old thousands to ensure themselves. It will cost nothing, because, in Australia at least, it is not possible to obtain life cover at 82 years of age. Not perhaps the best example to make your, otherwise very valid, point.

  • Sue Laing - the risk store on 20/02/2013 10:59:02 AM

    I was surprised to see Graeme who I have long respected use such an absolutist term as "inordinately expensive" in the context of the cost of life insurance. For one thing, death cover is not expensive unless you don't need it; TPD also can be seen by clients as reasonable if they understand the risks. And in any case as an adviser friend of mine always counters: Expensive...compared to what? It's this kind of emotive comment that hinders us in trying to help clients understand what the cost of doing nothing is compared to the cost of protection if there is a lot to protect. WIth the burgeoning of lending in SMSFs, life insurances including possibly income protection, by any measure and certainly by the debt protection principles espoused in adviser education, is the most cost effective solution to a fund's potential shortfalls of liquidity and funds if a member should die or be unable to earn an income.
    Blanket statements are downright dangerous and certainly unhelpful.

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