New rules for insurance held in SMSFs
Extra care is necessary when structuring insurance policies
Due to the tax deductibility of premiums and cash flow advantages, it has become more popular to hold certain insurance policies within superannuation funds.
However, changes to the rules governing superannuation funds, which apply broadly from 1 July 2014, mean extra care is necessary when structuring insurance policies within self-managed super funds (SMSFs).
Under these rules, new insurance policies held by SMSFs must comply with the new SIS Regulation 4.07D, which prohibits trustees of an SMSF from providing members with insured benefits that fail to comply with certain conditions of release.
The conditions in question are specified in Schedule 1 of the SIS Regulations, as follows:
- Death (item 102);
- Terminal medical condition (item 102A);
- Permanent Incapacity causing the member to permanently cease working (item 103); and
- Temporary incapacity causing the member to temporarily cease working (item 109).
These new rules effectively act to ensure insured benefits are able to be released to members in all circumstances.
In a practical sense, the new rules appear to restrict an SMSF from taking out an 'own-occupation' TPD insurance policy, as it would not meet the strict requirements for 'permanent incapacity' as required under an SMSF's conditions of release. That is, the triggering of an 'own occupation' policy would not in all circumstances result in a release of the proceeds to the member.
Furthermore, the new regulations also do not permit cross-insurance policies (effectively, policies on the life of one member that pay out to another member on death) on any new insurance products.
Due to grandfathering provisions built into the new regulations, there is no immediate requirement for SMSF trustees to change or review insurance policies held on behalf of members.
Under the grandfathering provisions, the new rules do not apply to the continued provision of benefits to members who joined a fund before 1 July 2014, or the provision of benefits under an approval granted before 1 July 2014. These grandfathering rules also allow trustees of superannuation funds to increase or decrease the level of cover and to adjust the associated premiums accordingly.
However, it is always recommended that SMSF trustees review any insurance policies held by their Fund on a regular basis.
Should you have any questions in relation to any of the above, please contact your trusted GCC advisor on 02 9899 3044.