Insurance in superannuation will go through significant changes over the next 12 months and both trustees and their advisers should be aware of the implications for SMSFs.
Trustees of an SMSF must have a strategy to address insurance for member/s of the fund.
This does not make insurance mandatory, but it forces the trustee to actively review the insurance requirements for fund member/s on a regular basis (ie. annually) (section 4.09 (2(e)) Superannuation Industry (Supervision) Regulations 1994).
This requirement was enacted on 7 August 2012.
Trustees will need to determine if it is appropriate for members to have: all their insurance inside superannuation; all of their insurance outside superannuation; some insurance inside superannuation and some insurance outside superannuation; or no insurance at all.
In making this decision, a trustee will need to take into consideration: cost of premiums, tax deductibility of premiums, taxation of benefits, liabilities of the individual member, age of the individual member, nomination of beneficiaries and conditions of release.
These considerations will need to be documented on a regular basis.
As the trustees of the SMSF are also the members of the SMSF, it should be relatively straightforward for each trustee to ensure that appropriate insurance strategies are addressed for the respective members.
When conducting the annual review of the insurance strategy of the SMSF, trustees will now need to consider what types of insurance policies (and their definitions) can be held by the SMSF.
Insurance definitions with superannuation
A regulated superannuation fund (APRA-regulated or ATO-regulated) may only provide an insured benefit to a member who joins after 1 July 2014 that satisfies a condition of release under Schedule 1 of the Superannuation Industry Supervision Regulations, namely:
• Death (item 102)
• Terminal illness (item 102A)
• Permanent incapacity (item 103)
• Temporary incapacity (item 109)
Any existing insurance policies already owned by the SMSF prior to 1 July 2014 will be “grandfathered” and all existing terms and conditions may remain in effect.
This would include such policies as “own occupation” TPD insurance or trauma insurance that was purchased by the SMSF prior to 1 July 2014.
While SMSFs would not be permitted to purchase these policies for the benefit of members after 1 July 2014, any existing policies that remain in force may stay in place.
Let’s examine each of these individually.
Death and terminal illness
There is no change to existing practices for either of these insurance benefits.
For death, the trustee must have reasonable proof (ie. death certificate from coroner) to satisfy the requirements for this condition of release.
For terminal illness, the trustee must ensure that it has received certification from two registered medical practitioners – one of which one must be a specialist – advising that the member's longevity is not likely to be more than 12 months.
Total and permanent disablement
The changes from 1 July 2014 will mean that only “any occupation” TPD definitions will be permitted to be purchased by SMSFs after this date.
Typical TPD benefits may not in themselves constitute permanent incapacity, such as: own occupation; loss of limbs; loss of sight; loss of independent existence; activities of daily living; or activities of daily work (SIS Regs 1.03c).
If a trustee wishes to retain the following benefits: loss of limbs and/or loss of sight; loss of independent existence; inability to perform activities of daily living; and/or inability to perform activities of daily work, then will they need to meet a “second hurdle” of “… and the member's ill-health (whether physical or mental) makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience”.
Again, this requirement is for any new TPD policy issued by a life insurance company to an SMSF after 1 July 2014. Existing policies that were in force prior to this date may remain owned by the SMSF.
Temporary incapacity (income protection)
Temporary incapacity benefits (income protection) have a number of provisions that must be complied with.
The member must cease to receive any gain or reward.
This means that an individual who is between jobs due to unemployment, retrenchment or redundancy, or is between contracts (including many people in the IT or mining industries), is not entitled to receive a temporary incapacity benefit from an SMSF (or any other super fund).
As benefits can only be paid for the period of incapacity, certain ancillary benefits paid via superannuation may be prohibited.
Critical illness or specified injury benefits that pay a predetermined monthly benefit (3x or 6x) when a person suffers an injury (broken bones) or illness (heart attack, cancer, stroke, etc) may be in excess of the period of incapacity (Schedule 1 – Item 109 – Part (b)). It is likely that ancillary benefits will be prohibited if there is any possibility that any member could return to work prior to the period of incapacity that had been paid in advance.
Trustees of SMSFs will not be permitted to purchase these policies on behalf of members after 1 July 2014. It should be noted that any existing insurance arrangements in superannuation for existing members that were in place prior to 1 July 2014 will be “grandfathered” and are permitted.
Existing members of superannuation funds may retain existing insurance benefits.
From 1 July 2014, any new members may only be provided with SIS Act compliant insurance benefits. New insurance arrangements inside super will become quite homogenous after 1 July 2014, and SMSF trustees may need to consider more generous terms and conditions outside super for their members (ie. trauma, own occupation TPD, and ancillary benefits for income protection).