LIFE INSURANCE OR NOT FOR MEMBERS.
SIS regulations have changed and SMSF trustees are now required to consider the life insurance requirements of the members of the super fund. This requirement now forms part of the Investment Strategy in order to ensure that the fund remains complying. Amended regulation 4.09 (2)(e) states:
The trustee of the entity must formulate, review regularly and give effect to the investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to the following (e) for a self managed superannuation fund whether the trustees of the fund should hold a contract of insurance cover for one or more members of the fund.
The change of this regulation widens the scope of the investment strategy considerations to now include the consideration of Life Insurance and TPD insurance that is usually offered under non SMSF superannuation funds. Further, the provision to review regularly has been added to the regulations requiring SMSF trustees to revisit their investment and insurance strategies when the members circumstances change and also on a periodic basis.
How much insurance a member should have is not determined by legislation or regulation. However, consider the sole purpose test for superannuation, the fund needs to provide for the death or disablement of its members in addition to retirement as part of its core operation and as such consideration needs to be given to TDP insurance along with life insurance.
CONSIDER: Many funds have as an investment in commercial or residential that is linked to a limited recourse borrowing arrangement. If a member was to die, it may not be the desired intention of the trustees to sell of the property to discharge member benefits. Thereby life insurance can provide a means of providing liquidity to the SMSF by providing a facility to provide a lump sum to members when required.
By not considering insurance for members, trustees may be exposed to potential liabilities. If a claim event occurs (death of member) and a members dependant or beneficiary considers the trustee did not adequately consider the members personal circumstances when deciding to hold a contract of insurance, the trustees and fund may be held liable for inadequate insurance provided or offered. The decision to hold or not to hold a contract for life or TPD insurance within the SMSF needs to be considered other insurance policies that the member holds along with overall strategy of the SMSF, cost of premiums etc. Like all trustee decisions, all decisions and review decisions need to be adequately recorded in SMSF minutes.
We recommend that both trustees and members discuss requirements with a life insurance specialist, so as to determine the specific recommendations to members, while also taking into consideration the investment strategy.
DISCLAIMER: The above is general advice only, you should not act on this advice without consulting a professional adviser to discuss your personal circumstances.