Busoli said generally SMSF members hold their life insurance cover either in a legacy APRA fund or as a standalone policy issued through a life insurer’s superannuation division.
“Sometimes members have superannuation life cover in more than one fund. There may be valid reasons for this. Perhaps they transferred from an APRA fund to an SMSF and retained their APRA fund cover as their replacement cover would have been unavailable, or available at a substantially higher premium due to medical or occupational loadings,” Busoli said.
“Similar considerations may also have applied to an existing super life policy. Or maybe the reason is because it was just easier to leave things as is. There are administrative and, possibly, tax consequences that result from this scenario.”
He said, administratively, the simplest solution is for the member to make ongoing contributions to the other fund sufficient to ensure the life cover continues, however, care is required because if the contributions are personal and a tax deduction is required, the relevant notice of intent needs to be attended to.
“I have also witnessed occasions where the member has forgotten they have made these additional superannuation contributions with the result that the three-year non-concessional bring forward has been inadvertently triggered,” he said.
“This has included the making of an excess concessional contribution, which the ATO has deemed to be non-concessional.”
Busoli added another solution to the problem of holding life insurance outside of the fund is to ensure an annual rollover from an SMSF to the other fund is made to cover the required amount.
“This is an administratively clumsy solution, particularly as it must now be processed via SuperStream and may not work on the first try. It does overcome the contribution issues though,” he said.
“Another consequence is the inability for the proceeds to be received by a pension account in the SMSF to potentially make the payout part of the tax-exempt component. It is not common for a member in pension stage to hold life insurance though this could be a valuable consideration for a younger pension member who has met a condition of release that is not age based.”
He added that employed members, including those who are self-employed, may create a significant future service tax deduction in their SMSF on the happening of an eligible life insurance event but this is not possible if the cover is not owned by the fund.
“If a member wishes to change this scenario, and have the cover provided by their SMSF, the process depends on how the external cover is now held. Cover cannot be simply transferred,” he said.
“For the APRA fund cover, a new policy would need to be arranged with the SMSF trustee as the owner. This will require new underwriting so the APRA fund cover must be maintained until the new policy is issued just in case unknown impediments arise during the process. The super life insurance cover will require the insurer’s cooperation to have the cover cancelled and reissued, without further investigation or change of premium.”
He said that in each case, to maximise the possibility of the future service benefit applying, the SMSF should pay premiums monthly, or fortnightly if available.