Having the right insurance cover such as illness and accident cover within your super fund is very important as it provides a level of security for members of the fund along with their families. Choosing the right insurance cover can be arranged by the SMSF trustee/s.
Generally, there are three types of insurance that are available through super, with these being:
- Income Protection Cover (IP) – this type of cover is relevant when you cannot work due to a temporary illness or disability. It provides an income stream whilst you are off work (generally 75% of your salary).
- Death or Life Insurance – The member organises this cover but it’s their beneficiaries that receive the benefit when that member passes away.
- Total and Permanent Disability (TPD) Cover – this type of cover allows you to receive a benefit if you become permanently disabled and unlikely to return to work.
Having insurance cover through your SMSF means that premiums are paid for by the fund, rather than the Member having to pay for them out of their own pockets. This helps with personal cash flow issues plus offering an effective 15% tax saving having the premiums paid by the super fund. Note that life insurance and total & permanent disability insurance are not tax deductible in your personal name.
Before considering any type of insurance, you will need to consider what products are best for your needs as there are some limitations around certain types of policies:
- Moving super funds or potentially having contributions cease, may cancel insurance policies without notice therefore leaving members uninsured
- Life insurance payouts may be delayed simply because the funds need to go to the super fund before they reach the correct beneficiary which can be held up due to the Trustees ensuring the correct beneficiary is receiving the funds
- Types of insurance available may be limited or not covered by super (i.e. trauma insurance)
- There could be tax implications on some benefits (i.e. if death benefits are not paid to a financial dependent there maybe tax on the proceeds)
It is always important to seek advice when considering what type of insurance cover is best for your individual needs. Speaking to an insurance broker is often a good start as they have the access to several products and are very hands on when understanding what best suits your needs.