It is quite common for individuals to hold insurance cover inside super. If a trustee of an SMSF decides to offer insurance cover to members, it is critical the policy is set up correctly from the beginning.
Of particular importance is the ownership of the policy. An insurance policy is, after all, an asset of the fund. Like other fund investments, an insurance policy held for an SMSF should be held by “the individuals as trustees for the fund” in cases where the fund has individual trustees or held by “the company as trustee for the fund” in cases where the fund has a corporate trustee.
If the SMSF pays premiums in respect of a policy that is owned personally by a member, the trustee will have failed to exercise the same degree of care, skill, and diligence as an ordinary prudent person when dealing with the assets of the fund (and may be potentially liable for any losses caused). They may have also failed to keep the assets of the SMSF separate from any assets held personally by the trustee. In addition to this, the fund will have also maintained a policy for which the fund will not receive a benefit. If a claim were made and admitted by the insurer, the proceeds would be paid to the member personally, not the SMSF - the SMSF has paid premiums on a policy for which it will never recover any proceeds. This may be considered financial assistance to the member and cause the fund to breach the sole purpose test. Steps will need to be taken to rectify this breach, including reimbursing the SMSF trustee for premiums paid in respect of the member’s policy.
Ownership is just one of a range of issues that trustees should consider when determining whether to hold or maintain an insurance policy inside super. To find out more about the other issues to have regard to be sure to join us for our session on Insurance & SMSFs at our upcoming virtual Superannuation Intensive Day next Thursday 15 September. We will explore the types of insurance cover an SMSF can hold, how the super and tax laws come into play in relation to insurance proceeds, premiums, and benefits to help you help your clients to optimise their arrangements and avoid pitfalls.