A consideration the law requires

Superannuation regulations require trustees to consider, as part of the fund's Investment strategy, whether the fund should hold insurance cover for its members. This is a requirement to turn attention to the question and record the outcome, not a requirement to buy insurance.

Because it sits within the investment strategy, the insurance question is revisited whenever the strategy is reviewed. An auditor looks for evidence that the trustees genuinely considered insurance, and a dated note recording that members' cover was reviewed and a decision reached is generally sufficient.

The types of cover a fund might hold

SMSFs commonly consider three kinds of cover for members: life insurance, which pays on death; total and permanent disability cover, which pays if a member is permanently unable to work; and income protection, which replaces part of a member's income if they cannot work for a time.

Since 1 July 2014, an SMSF generally cannot provide insurance unless the cover aligns with a condition of release, such as death, terminal medical condition, permanent incapacity or temporary incapacity. This means certain older-style policies, such as own-occupation total and permanent disability or trauma cover, are usually not available through a new SMSF policy.

Holding cover inside super

Holding insurance inside the fund means premiums are paid from the fund rather than from a member's take-home pay, and for some cover the fund may claim a tax deduction.

Premiums paid from the fund reduce the member's retirement balance over time, and the fund must keep enough Liquidity to pay them, which is relevant for a fund holding Illiquid Assets such as property. Benefits paid from super can also be taxed differently depending on who receives them and the components involved.

Cover that can be lost when switching funds

Default cover held in an APRA-regulated fund can cease when a balance is rolled out to an SMSF, sometimes automatically. Closing the old account before arranging new cover can leave a member unprotected.

Obtaining equivalent cover through the SMSF is not guaranteed. Premiums and eligibility depend on a member's age and health, and cover that was easy to hold in a large fund on a group basis may be more expensive or harder to obtain individually.

A hypothetical example

Consider a hypothetical example. The Okafor family SMSF has two members in their forties with a Mortgage and young children. The trustees consider insurance as part of the strategy, decide to hold life and permanent disability cover for both members, and record the reasons.

A fund that never addresses insurance at all leaves a compliance gap that an auditor may raise, since the absence of any recorded consideration means the trustees cannot show they turned their minds to the issue.