Superannuation regulations require SMSF trustees to consider whether the fund should hold insurance cover for one or more members as part of formulating and reviewing the Investment strategy. This is a duty to consider, not a duty to insure. Trustees can decide the fund will not hold insurance, but they must genuinely turn their minds to the question and record the decision.

The cover the fund can hold

An SMSF can typically hold life (death) cover, total and permanent disability (TPD) cover and income protection cover for its members. Since mid-2014, insurance policies taken out through a fund must align with a condition of release, so the insured event and the circumstances in which super can be paid line up. This is why some older definitions, such as certain own-occupation TPD policies, are generally not offered inside super any longer.

The effect of leaving group cover behind

Large funds often provide default insurance at group rates, sometimes without full medical underwriting. When members roll out to an SMSF and close the old account, that cover can end. Replacing it individually may cost more, and a change in a member's health may make equivalent cover unobtainable.

Retaining a small balance in an existing fund to keep valuable insurance is an option some members use, though holding two accounts has its own costs.

How much cover is appropriate

The appropriate level of cover depends on each member's circumstances — age, dependants, debts, other Assets and income needs. As a hypothetical illustration, a member in their forties with a Mortgage and young children may have very different needs from a member in their sixties who is debt-free and approaching retirement. The strategy should reflect these differences and the reasoning should be documented.

Paying for cover and its effect on the fund

Premiums are paid from the fund, so they reduce the balance available for investment and must be built into the fund's cash-flow planning. For a fund with limited Liquidity — for example, one holding mostly property — there must be enough accessible cash to pay premiums when due.

Reviewing insurance over time

Insurance needs change as members age, pay down debt, have children or approach retirement. Because the investment strategy must be reviewed regularly, insurance should be revisited at the same time. Recording each review, and the reasons for any change, demonstrates that the ongoing duty is being met.

Insurance, tax and estate planning

Premiums for certain cover held in the fund may be deductible to the fund, which can make cover inside super cost-effective compared with holding it personally. Benefits paid on death can be taxed differently depending on who receives them, with amounts paid to non-dependants for tax purposes potentially taxed more heavily than those paid to dependants.

Coordinating insurance with the fund's death-benefit nominations and members' estate plans affects how proceeds are ultimately paid and taxed.

A checklist for the process

A sound insurance process for an SMSF involves: considering each member's need for life, TPD and income protection cover; checking whether valuable cover exists in another fund before closing it; confirming any new policy is in force before old cover ends; ensuring the fund has the Cash Flow to pay premiums; documenting the decision and reasoning in the investment strategy; and reviewing the position whenever circumstances change or the strategy is updated.