Following an amendment to the superannuation regulations, SMSF Trustees must from the 2012/13 year onwards, give consideration to whether the SMSF should hold insurance cover for the members.
The new regulation means that Trustees, who are also normally the members, must now consider insurance in order to discharge their obligations under the SIS Act. For newly established Trustees, insurance should be considered when formulating the initial investment strategy. For existing SMSF’s, this practice should form part of the regular investment strategy review.
What the legislation requires
Paragraph 4.09 (2) (e) of the SIS Regulations now requires that a Trustee of a superannuation fund must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the fund, including whether the Trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.
There is no rule on how often Trustees need to consider the insurance needs of members, but it is prudent to document this at least annually.
If no changes to insurances in the SMSF are required at least annually, it is preferable not to simply state that the current arrangements have been reviewed and are appropriate for the members. The Trustees should document the reason(s) why the decisions were made. This will provide evidence the new requirement has been addressed
The level of cover is not stipulated in the Regulations, but rather the Trustees are expected to be self-reliant in determining the type and level of insurance that members may require.
The Explanatory Memorandum to the new regulation states that in meeting this requirement, Trustees should have regard to the personal circumstances of the members. For example, if a member holds insurance cover outside of the SMSF, this should be considered in determining how much, if any, insurance the SMSF should hold for the member.
Trustees may evidence this requirement by documenting decisions in the fund’s investment strategy or annually in minutes of Trustee meetings if no changes are made to the investment strategy.
Types of insurance that should be considered
Trustees should consider whether fund members need additional life, total and permanent disability (TPD) and income protection (or salary continuance) insurance.
It’s important to note that from 1 July 2014, it will no longer be possible to take out new policies in super that don’t align with the conditions of release in superannuation law. This includes TPD policies that pay a benefit if the member is unable to work again in their own occupation and insurance that pays a benefit if the member suffers a critical illness specified in the policy.
Trustees may therefore want to consider these types of insurance before this window of opportunity closes and address them in the investment strategy.
Some reasons why a member may not require insurance cover
- when the member has indicated that they have no need for cover as their debts are low and needs are fully funded;
- the member has sufficient insurance cover in other super funds (members often keep employer or industry funds open to avail themselves of lower group rates);
- the member has other insurance arrangements outside of the super;
- that due to illness or injury the cost of premium is too high for the cover provided;
- the member has been declined for cover due to occupation or pre-existing conditions; and
- the member does not believe in insurance or is unwilling to pay the cost of the premium.
As mentioned above, the actual reasons should be documented each year in the investment strategy or annually in minutes of Trustee meetings if no changes are made to the investment strategy.
SMSF trust deed
The governing rules of the SMSF must allow the Trustees to hold insurance for fund members and should specify the types of insurances that can be held.
The governing rules may therefore need to be amended to cater for the new requirements, especially if own-occupation TPD or trauma insurance is warranted.
