Buying insurance within an SMSF can give access to deductible expenses that would otherwise not be available, as some insurance premiums, such as for life insurance (which typically cannot be claimed as deductions by individuals for income tax purposes) may be available as tax deductions for the SMSF.
The same concession applies for any super fund, but the deductibility is available to the fund itself — therefore previous members of retail or industry funds who subsequently set up their own SMSF may not be aware of the deductibility of insurance premiums.
On top of this, life insurance payouts made to death benefit dependants of the deceased via a super fund are tax-free, regardless of whether a tax deduction for premiums has been claimed or not. Note however that insurance benefits paid to a non-dependant may attract tax, and death benefits can only be received as a lump sum.
The forms of insurance open to trustees to buy via an SMSF are:
- life insurance
- total and permanent disability insurance (TPD)
- income protection (IP) insurance
The rules about the deductibility of premiums for life insurances distinguish between the premiums paid to provide a benefit and premiums that have a savings element – as is the case with certain variable life policies that build a cash value. No deduction is available for the proportion of the premium that supports this investment element.
The one essential however is that policies must be held in the trustee’s name, and the fund must be the sole beneficiary of the policy. And it is prohibited from transferring existing life insurance policies of related parties to the SMSF — the law prohibits a super fund from acquiring an asset from a “related party”, and an insurance policy is a financial asset.
Another point to note regarding the income protection insurance is the “occupation clause”. If the income protection insurance will pay benefits in cases where the insured becomes disabled and consequently is unable to perform work in their own occupation, then premiums for such insurance will only be partially deductible. In contrast, if the matter was about not being able to work in any occupation, which is a more restrictive clause, then the deduction for full policy is generally available.
Note that other forms of insurance, such as health insurance, may not fit with the “sole purpose test” and therefore it would be inappropriate to hold such policies in an SMSF. However the ATO has ruled that trauma insurance is consistent with the sole purpose test (although the cover must be held for trustees/members only).