Wealth Management Super & SMSF

The Importance of Considering Insurance in Self-Managed Super Funds (SMSFs)

Trent Doughty
by Trent Doughty
3 min read
23 September 2024

Take outs:

  • SMSF trustees must act in the best interests of all fund members, including regularly reviewing the fund's investment strategy to ensure adequate insurance coverage is considered.

  • Key insurance options for SMSF members include life insurance, total and permanent disability (TPD) insurance, and income protection insurance, which protect against unexpected events and financial hardship.

  • Failing to consider insurance can lead to personal liability for trustees, financial instability for members, and potential regulatory breaches, risking penalties from the Australian Taxation Office (ATO).

  • Trustees should regularly assess insurance needs within the investment strategy and seek expert advice, such as from Kelly+Partners Private Wealth, to identify coverage gaps and enhance financial protection for members.

The Importance of Considering Insurance in Self-Managed Super Funds (SMSFs)

A Key Fiduciary Responsibility

Self-Managed Super Funds (SMSFs) have become an increasingly popular vehicle for individuals seeking greater control over their retirement savings. However, with the enhanced control comes increased responsibility, and trustees must ensure they are meeting all fiduciary obligations. One critical area often overlooked by SMSF trustees is the need to consider insurance for members as part of their fiduciary duty.

We explore the importance of considering insurance in SMSFs, the risks of neglecting this responsibility, and how to address these considerations effectively. It also highlights the benefits of seeking expert guidance to ensure compliance and protection of SMSF members.

Fiduciary Duty in SMSFs

SMSF trustees are legally required to act in the best interests of all fund members, ensuring that the retirement benefits of those members are maximized. Among these obligations is the requirement to regularly review the fund’s investment strategy, which should also consider whether the fund’s members need insurance coverage.

The Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) explicitly mandate that trustees must consider insurance for fund members as part of their investment strategy. However, many trustees focus primarily on investment selection and growth, often overlooking the essential protection that insurance offers.

Why Insurance Matters in an SMSF

Insurance plays a vital role in protecting SMSF members against the unexpected. Some key insurance types that trustees should consider include:

Life Insurance

Provides financial security to dependents in the event of a member’s death, ensuring beneficiaries can access funds without depleting other retirement savings.
Life Insurance

Total and Permanent Disability (TPD) Insurance

Offers financial support if a member becomes permanently disabled and unable to work.
Total and Permanent Disability (TPD) Insurance

Income Protection Insurance

Replaces a portion of a member’s income if they are unable to work due to illness or injury for an extended period.
Income Protection Insurance

Without adequate insurance, an unexpected event could lead to significant financial hardship for SMSF members and their families. Trustees have a duty to ensure that members are not left vulnerable by a lack of insurance coverage.

Risks of Neglecting Insurance in SMSFs

Failing to consider insurance can expose trustees to a range of risks, including:

Personal Liability

Trustees can be held personally liable if they fail to meet their fiduciary obligations, which may include overlooking the need for insurance.

Personal Liability

Financial Hardship for Members

In the absence of adequate insurance, an unforeseen event can severely impact members’ financial stability, forcing them to draw down on their retirement savings prematurely.
Financial Hardship for Members

Regulatory Breaches

The Australian Taxation Office (ATO) monitors SMSF compliance. A failure to consider insurance as part of an investment strategy can result in non-compliance, leading to penalties.

Regulatory Breaches

How Trustees Can Address Insurance Needs

To ensure they are meeting their obligations, SMSF trustees should:

  1. Review the Fund’s Investment Strategy Regularly: Incorporate an assessment of insurance needs into the fund’s investment strategy. This ensures that any changes in members’ circumstances, such as age, dependents, or employment status, are reflected in their insurance coverage.

  2. Seek Professional Advice: The insurance landscape can be complex, with various products, features, and policy conditions to navigate. Trustees should seek guidance from Kelly+Partners Private Wealth who understand SMSFs and can access solutions to the members needs.

How Kelly+Partners Private Wealth Can Help

At Kelly+Partners Private Wealth (KPPW), we understand the complexities of managing an SMSF and the importance of safeguarding the financial well-being of fund members. As part of our holistic approach to wealth management, we encourage all SMSF trustees to review their insurance needs regularly.

To assist you in fulfilling your fiduciary responsibilities, KPPW is happy to provide a complimentary portfolio review, including an assessment of your fund’s insurance and investment strategy. Our experienced advisors can help identify any gaps in coverage and ensure that your fund is well-positioned to protect its members’ interests.

Conclusion

SMSF trustees play a vital role in managing the financial future of fund members, and considering insurance is a critical part of their fiduciary duty. By regularly reviewing the need for insurance and seeking professional advice, trustees can ensure that they are protecting the long-term financial security of fund members.

If you would like to discuss your SMSF’s insurance and investment needs or arrange a complimentary portfolio review, please get in touch today.
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