It's possible to fund your Total and Permanent Disability Insurance through a SMSF. Find why it may be beneficial for you.
Rather than purchasing retail life insurance, a growing number of people are choosing to fund their life insurance through their superannuation. Owning insurance through a SMSF has a number of benefits, the most important of which is the protection and peace of mind this type of cover offers to your family.
Owning TPD Insurance in SMSF can also be a more tax-effective option than taking out cover personally, helping you to save money. If cash flow is tight, this option lets you fund your cover from your super balance and contributions, freeing up your income to be spent on day to day expenses.
Benefits of funding TPD Insurance in SMSF
- Increased cash flow. Taking out Total and Permanent Disability Insurance in SMSF lets you fund your cover from your super fund balance and contributions. As a result, you are able to free up more cash to spend on a day to day basis. This makes insurance through super an attractive option for those with poor cash flow, such as young families or those starting a small business.
- Tax deductible. When you hold a TPD Insurance policy personally, your premiums are not usually tax deductible. However, if your premiums are paid using the money in your SMSF, they are tax deductible. This can help make TPD Insurance a more affordable option for many.
- Protection and peace of mind. It’s vital to have life insurance cover in place to ensure your family will be protected financially if something happens to you. TPD Insurance in SMSF offers security, stability and peace of mind for your family.
Disadvantages of funding TPD Insurance in SMSF
- Cost. The cost of Total and Permanent Disability Insurance in SMSF can be more expensive than TPD policies offered by large retail or industry funds. This is because of the lack of accessibility to wholesale savings that large funds can take advantage of.
- Qualifications. SMSF members may need to undergo more rigorous testing (for example medical tests) in order to qualify for cover, whereas this is not required for retail or industry funds.
- Super cap. With a $25,000 annual limit on tax advantaged or concessional contributions to your SMSF, you need to be aware that your insurance premium payments will count towards this cap. If you exceed the cap limit you will be charged a penalty tax.
- Reduced investment balance. If you use your super balance and contributions to pay your TPD insurance premiums, you’re obviously going to have fewer funds left over to pay for your retirement. This could come back to bite you some time in the future.
- Tax. In some circumstances you will have to pay tax on TPD insurance payouts.
- Fewer features. SMSFs are not allowed to offer many of the additional benefits and features offered by insurance providers. This can result in a reduced level of cover that may not meet your needs.
Can I get 'Any Occupation' TPD Insurance in a Self Managed Super Fund?
Any Occupation TPD Insurance is no longer offered through superannuation.
What is any occupation TPD?
Any Occupation TPD Insurance through Superannuation: Any Occupation means you are eligible for cover if your disability means you no longer are able to work in any job you are reasonably qualified or experienced to perform, and you never expect to be able to return to the workforce.
Premiums under this definition are cheaper than under the Own Occupation definition below, but it only provides a narrow range of cover. Any Occupation premiums are, however, fully tax deductible to the SMSF.
Is TPD Insurance in SMSF Tax Deductible?
Although SMSF TPD policies are no longer available, this can be relevant if you bought your policy before July, 2014.
While a benefit payment from a standalone TPD policy is tax free, payouts from a TPD policy inside your super is taxed at a rate up to 21.5%. The actual tax rate varies depending on:
- How long you have been a member e.g. the longer you have been a member, the higher the tax rate.
- Time until retirement e.g. tax rate increases as you get closer to retiring
In terms of premiums, the SMSF can usually claim a tax deduction on these. In addition, using contribution plans like salary sacrifice can reduce the cost of cover through the use of pre-tax dollars to pay for premiums.
How are Total and Permanent Disability claims paid from SMSFs?
Once you’ve made a successful claim, the benefit payment is sent to the SMSF trustee. But that payment can only be passed on to you or your beneficiaries once a condition of release has been met. These conditions include temporary disability, permanent disability or death.
It’s up to the SMSF trustee to determine whether a condition of release has been met, and then the benefit can be paid either as a lump sum or as an income stream. In terms of taxation, an income stream can be quite an effective option.
Is it possible to transfer a policy into a SMSF?
It is not possible for a SMSF to acquire an insurance policy from a member or even from a member’s relative, so you cannot transfer an existing policy to a SMSF. However, as long as there are no underwriting issues to take into consideration, your policy can be cancelled and then a new policy issued with similar terms and owned by the SMSF. In these circumstances there will be no need to supply further medical evidence.
The SMSF will be noted as the owner on your new TPD policy, and holding all of your insurance cover inside an SMSF can be a tax-effective option for many.
When deciding whether or not to hold Total and Permanent Disability cover personally or within a SMSF, take some time to weigh up your options. Each approach has its own benefits and drawbacks, many of which can differ depending on your personal circumstances. It’s also a wise idea to seek advice from an expert to ensure you end up with an adequate level of TPD Insurance cover.