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They say that the best insurance is the one that you never make a claim on, and it seems that many self-managed superannuation fund (SMSF) trustees had in the recent past mistakenly taken this to mean that not having any insurance cover at all was a viable option (a relatively recent review of the sector found that only 13% of funds were covered).
But the regulator disagreed — especially in the face of the statistical data available on the realities of injury, illness or death throughout the nation’s working population.
Therefore, since mid-2014, the regulations that govern SMSFs stipulate that trustees are required to consider the insurance needs of every fund member and, to remain compliant, document that this has been done as part of the fund’s investment strategy. Advisers to SMSF trustees are also required, through reforms to the Future of Financial Advice (FOFA) regime, to advise their SMSF clients of the need to consider insurance under the umbrella of their “best interest” duty.
So with insurance needs firmly on the agenda (although note that actual cover is not required, merely evidence that it has been considered), SMSF trustees need to ensure their fund meets these requirements. Using a checklist of issues to consider is one way to achieve this, as is having each member of the fund sign a declaration that they have considered their insurance needs.
An example of issues to consider in a checklist include:
Advantages and disadvantages
In determining whether to have insurance within their fund, trustees need to consider the advantages and disadvantages of having their insurance in their SMSF.
Advantages of having Insurance in an SMSF
Some of the advantages of having insurance in your SMSF include:
Disadvantages of holding insurance in an SMSF
While reviews of the sector have recommended that funds have insurance, and all My Super funds will have minimum insurance requirements, there are disadvantages, particularly for SMSFs, of holding insurance in the fund. These disadvantages include:
Trustees therefore need to adequately consider the advantages and disadvantages of holding insurance in their SMSF. They must also consider whether it is better to hold any insurance in their fund or maintain it outside the superannuation fund, as well as the costs of having insurance.
The requirement that trustees evidence consideration of insurance, while not requiring actual cover, is in itself indicative that the regulator recognises that insurance held within an SMSF may not suit every circumstance. While the small percentage of SMSFs with insurance protection may be a reflection of a lack of consideration of insurance needs or a lack of understanding of insurance, it may also be as a result of a rational weighing up of the pros and cons and a considered determination that there are better avenues for holding insurance than through their SMSF.
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