Self-managed super funds (SMSFs) give people more control over their superannuation, and they can also hold personal insurance policies such as life insurance, total and permanent disability (TPD) insurance, and income protection insurance. There may be several advantages of purchasing life insurance through your SMSF, but there are also some drawbacks you may not have considered. Here are some of the pros and cons of having SMSF life insurance compared with having an insurance policy outside of super.
Life and TPD insurance are typically tax deductible if owned by a SMSF, but not if owned by an individual. Income protection insurance is generally tax deductible on policies outside of super.
Note: The rules on TPD tax deductibility have changed as of July 1, 2011. You can only receive a full tax deduction on your premium if your illness or injury is enough to deny you the opportunity to work in any occupation for which you are reasonably qualified for. Only a partial tax deduction can be permitted if ill health prevents you from being employed solely in your own occupation.
Holding your life insurance with your SMSF boosts your cash flow flexibility, as you will be able to pay your insurance premiums directly from your SMSF account rather than taking it out of your regular income.
It is generally difficult to successfully claim for trauma insurance benefits. To claim trauma (or critical illness) benefits, you need to satisfy strict conditions of release, which means it could take some time to process the claim.
If the payout of a life insurance claim goes to a non-dependent tax will need to be paid. This is usually deducted from the Life insurance payout and or benefit.
Speak to one of our advisors for further information on the benefits of obtaining life insurance through your SMSF and to ensure your coverage is sufficient for your needs.