Key Rules and Essential Considerations
If you’ve chosen to manage your own SMSF, it’s likely you’re also proactive and responsible regarding insurance.
Whether you currently hold life insurance outside super or within an existing super fund, starting an SMSF requires attention to your insurance strategy.
SMSF trustees must assess whether to obtain suitable insurance coverage for each fund member as part of developing their investment strategy.
What are the rules?
Legally, all SMSFs must prepare a documented investment strategy during setup.
This strategy—including any insurance coverage—must be regularly reviewed by the fund’s trustees to ensure it aligns with members’ evolving needs and circumstances. Compliance with this investment strategy is checked annually by a licensed SMSF auditor.
In 2015, the Federal Government’s Super System Review found that SMSF members were more likely to hold insurance outside super compared to members in other superannuation sectors. Consequently, SMSFs are not required to provide default insurance for members as many public sector funds do.
However, SMSF trustees still need to carefully consider each member’s financial situation to determine if they have adequate insurance coverage. Key considerations include:
- Current debt levels of members
- Whether members have dependents and, if so, how those dependents could be financially supported in the event of the member’s death or inability to work.
What types of insurance cover can SMSFs provide?
SMSFs are permitted to offer any insurance cover that aligns with one of these superannuation conditions of release:
- Death (life insurance)
- Permanent incapacity leading to the member’s permanent cessation of work (total and permanent disability insurance or TPD)
- Temporary incapacity that causes the member to stop working temporarily (income protection insurance)
- Terminal illness diagnosis (by two medical professionals) indicating likely death within two years, generally included as a feature in life insurance policies.
Note: With TPD insurance, insurers apply different definitions and features. A key distinction in TPD policies is occupation type, with two options:
- ‘Own occupation’ provides benefits if the member cannot work in their specific role
- ‘Any occupation’ offers benefits only if the member is unable to work in any gainful role they are reasonably suited for.
SMSFs cannot hold ‘own occupation’ TPD policies unless issued before 1 July 2014, as policies issued after this date must meet a condition of release to ensure proceeds are accessible before members reach preservation age. The ‘any occupation’ definition aligns with the permanent incapacity condition, so it is the permissible definition.
Each of the above conditions of release allows a fund member to access their super funds regardless of reaching preservation age.
Once you determine the insurance cover type you need, you can weigh the benefits of holding it within your SMSF, an existing super fund, or personally, outside super.
Ensure your SMSF’s insurance strategy meets legal standards and protects your members — review your coverage options and compliance obligations today.
