A good time to revisit insurance
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Brad Twentyman is a director of superannuation at Pitcher Partners.
The Superannuation Industry (Supervision) Amendment Regulations 2012 (No. 2) tabled last month require consideration of whether SMSFs (self-managed superannuation funds) have adequate insurance cover for members.
It is an important conversation. Hopefully, these rules will be a positive and result in the conversation occurring more frequently.
Risk insurances aren't always on a person's radar - particularly when they set up their own SMSF. But they should be.
When part of a large fund, some form of automatic insurance cover would often be in place.
When an individual has set up their own fund and closed their large fund account, the cover would lapse. In our experience, people don't always realise this will be the outcome of the actions taken to establish their own super fund.
The insurance question should be something a person considers carefully before transferring all of their money out of a large fund into an SMSF, that is, what cover do they have, what they would lose, what options exist to replicate or retain cover at required levels.
As a general rule, the older one gets the less flexibility they are likely to have.
Our advice would be to treat the new rules as an opportunity to really focus on the adequacy of insurance cover and resist complying by merely adding a standard sentence into the current investment strategy or year-end trustee minutes of the SMSF in question.
If a shortfall in coverage is identified another conversation should be had as to how that shortfall should be addressed.
Importantly, the super fund may not be the right structure in which to hold risk cover.
As a general rule, holding insurance in a super fund can be attractive because there is money there to pay premiums and you may get a tax deduction that would not be available if the policy was held in another structure. In some cases, the cost of insurance may be less in super as the insurer's risk can be spread across multiple members.
However, there can be a significant tax bill if insurance proceeds pass to adult children - around 31.5 per cent.