Appearing on ifa’s sister brand, the SMSF Adviser podcast, head of technical services at Colonial First State (CFS) Craig Day explained that risk advisers need to be wary when selecting and implementing insurance policies for clients inside their super fund to ensure they don’t encounter any unnecessary hurdles if and when they need to use it.
“One of the issues that a trustee and their adviser needs to be across when thinking about insurance inside a self-managed super fund is the simple fact that you’re going to be going out and buying an individual retail policy,” Day said.
“Since the first of July 2014, the rules are that a trustee is not allowed to go out and buy an insurance policy unless, in all circumstances, that any proceeds that would trigger on the realisation of an insured event is able to be paid out as a benefit.
“So, what I’m essentially saying there is that that policy must line up with [SIS Act] conditions of release.”
He explained that advisers need to be particularly cautious when securing total and permanent disability (TPD) cover as the policy must meet the conditions set by the SIS Act and the fund, which can cause some complications.
“So when you’re going and buying an individual policy, you’ve now got the obligation to go in and say, ‘Is there anything about that particular TPD policy that would provide a benefit to the super fund, a cash payout that wouldn’t get over the bar of, or wouldn’t be required to get over the bar of that member being totally and permanently incapacitated?’” Day said.
Using an example, Day explained that holding policies inside an SMSF potentially creates additional barriers for the release of benefits to a client as they must satisfy the terms of release set by the policyholder and the fund.
“You might have TPD policies that have loss of limb and/or sight benefits available … If someone held that sort of policy in their own name, and they lost one limb and/or two limbs or one limb and one eye, then automatically there is a benefit, a lump sum benefit, payable,” he said.
“Now, if that was to be held inside a superannuation fund, there would also have to be the hurdle that that resulted in that person satisfying the permanent incapacity condition of release, that is that they’re no longer able to work in any occupation for which they’re qualified by education, training or experience.
“So we’ve now got that additional compliance risk that we need to know that we’re buying a policy that actually complies with the SIS rules.”
Day stated that advisers working in the risk space must remain knowledgeable about the compliance requirements and the complexities that come with holding insurance via an SMSF as they may need to navigate issues if something were to go wrong with the policy.
“Sometimes administrators are very good at dealing with this and sometimes they’re not that great in dealing with it, and unless you get all your T’s crossed and your I’s dotted, then you can actually fall foul of the cashing rules here very easily as well,” he said.
“So there’s a lot to think about. Having an understanding of all the SIS compliance rules, the cashing rules, as well as the quirks of how these funds are administered is really important to have in your head before you start going and recommending these types of policies inside these types of funds.”
This why split tpd works