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.”