SMSF clients must now consider insurance – life, TPD and income protection – inside super, following concerns that SMSFs don’t have sufficient cover.
It is estimated that less than 20% of funds carry insurance cover for their members, not including insurance cover held by members individually. The investment strategy for an SMSF now has to show that the insurance was considered, and Michael Harkin, national manager, Training and Advice, for Topdocs, says this provides advisers with the opportunity to be more proactive.
“The investment strategy for years has been something that has been there as a nuisance requirement but it now takes on a lot more importance. It can be used as a more positive strategy than it tends to have been considered in the past.”
Harkin says advisers should use the opportunity to review clients’ overall level of insurance cover, and then decide if it is necessary or feasible to have it inside the fund.
“There are times when it’s possibly better not to have it in the super, for example a single person with adult children who would receive their super benefits – there would be tax on that super.”
For others, it will be beneficial to have it inside the super, particularly with funds who have entered into a LRBA, says Harkin.
“One of the biggest advantages is providing members with cash-flow. Because insurance premiums can be paid out of SMSF income, members are seldom out of pocket. This is especially advantageous to those who need all their after-tax income to meet their day-to-day living requirements,” he says.
The need to now consider insurance inside SMSFs will have people reviewing their cover, and ultimately, will result in more Australians with greater insurance, according to Harkin.
“The investment strategy must be reviewed regularly, but with the consideration of insurance, it is an opportunity for advisers to be a bit more proactive with clients on looking forward regarding the investment strategy, rather than reviewing it after event. It can be a tool for discussion and forward looking with the clients.”