When people set up a self-managed super fund (SMSF), they often focus on investments and forget a requirement that sits right inside the Investment strategy rules: trustees must consider whether the fund should hold insurance for its members. This is one of the more misunderstood obligations in super. It does not mean every SMSF must buy insurance — it means every SMSF must think about it and record the decision ATO SMSF investment requirements. For members who have left large funds to run their own, that thinking can be more important than they realise.

What the rule actually says

The law requires an SMSF's investment strategy to include consideration of whether the trustees should hold a contract of insurance that provides cover for one or more members ATO SMSF investment requirements. The operative word is “consider”. Trustees are not compelled to take out life, total and permanent disability (TPD) or income protection cover. But they are compelled to turn their minds to it and to document their conclusion — even if that conclusion is that no insurance is needed.

Why this matters most in an SMSF

In a large APRA-regulated fund, members frequently have default insurance cover attached to their account, sometimes without actively choosing it. When people roll their super into an SMSF, that default cover is usually lost. Unless the SMSF arranges its own policies, members can find themselves with no life or disability cover at all — often at exactly the stage of life when they have a mortgage, dependants or a Business relying on them. The move to an SMSF can therefore quietly strip away protection the member did not know they had.

The Liquidity angle

Insurance also connects to a problem discussed across SMSF planning: liquidity. If a member dies, the fund usually has to pay a death benefit, and a non-dependant must generally be paid a lump sum ATO death benefits. A fund whose value is tied up in property can struggle to find that cash. A Life insurance policy owned by the fund can provide the liquidity to pay a death benefit without a forced sale of the fund's main asset. Viewed this way, insurance is not only personal protection but a tool for keeping the fund solvent through a difficult event.

How insurance works inside the fund

Where an SMSF holds insurance, the fund is the policy owner and pays the premiums from fund assets, and the proceeds are received by the fund and paid out as part of the member's benefit. Certain premiums — such as for death and permanent incapacity cover — are generally deductible to the fund, which can make holding cover inside super tax-effective, though the tax treatment of proceeds depends on who receives them. As always, the arrangement must fit the sole purpose test and the fund's deed ATO SMSF investment requirements. This is an area where the interaction of insurance, tax and estate planning benefits from advice.

Types of cover to weigh

The consideration is not just yes-or-no; it is about which cover suits each member. Life (death) cover provides a lump sum to the fund on a member's death, helping fund a death benefit. Total and permanent disability cover pays out if a member can no longer work, and can be structured to align with a permanent incapacity condition of release. Income protection replaces income during a period of illness or injury. Each has different premium costs, tax treatment and relevance depending on a member's age, debts and dependants. A 35-year-old member with young children and a Mortgage has very different needs from a 68-year-old member drawing a pension, and the strategy should reflect that rather than applying a single answer to everyone.

Cost and its drag on returns

Premiums are paid from the fund, so they reduce the member's balance over time. That is not a reason to avoid cover, but it is a genuine trade-off the strategy should weigh: the protection a policy provides against the drag its premiums place on retirement savings ATO SMSF investment requirements. Holding cover inside super can ease the cash-flow burden because premiums are funded from super rather than take-home pay, and some premiums are deductible to the fund, but the underlying cost is still borne by the member's retirement savings. Reviewing the level and cost of cover periodically — not just at set-up — keeps the balance between protection and cost sensible as a member's needs fall away with age.

A hypothetical example

Hypothetical: Nadia, 47, rolls $220,000 from a large fund into a new SMSF to invest in property, not realising her old fund included $400,000 of life cover. She has two children and a mortgage. In setting up the SMSF, the trustees are required to consider insurance. If they document that Nadia has adequate cover elsewhere, that is a valid decision. But if they simply never turn their minds to it, and Nadia dies uninsured, her family loses protection she previously had. Considering insurance at set-up — and recording the outcome — is the difference between a deliberate choice and an accidental gap.

Making — and recording — the decision

The practical steps are straightforward. When you establish the fund, and at each strategy review, assess each member's insurance needs: existing cover, dependants, debts, and the fund's own liquidity needs on a member's death or disability. Decide whether the fund should hold cover, for whom and how much — or decide that it should not — and write the reasoning into the investment strategy ATO SMSF investment requirements. Because the requirement is to consider rather than to buy, a documented decision either way satisfies the rule, while silence does not.

It is worth stressing the nuance so it is not misread: there is no rule that an SMSF must purchase insurance. A fund whose members are older, debt-free and well-protected may reasonably decide against it. The obligation is one of genuine consideration, appropriate to each member's circumstances, revisited as those circumstances change. Treat insurance as a live item in your strategy rather than a box to tick, and you will both meet the requirement and, more importantly, avoid leaving yourself or your family unexpectedly exposed.