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TPD within a SMSF – Beware

Insurance within a Self-Managed Superannuation Fund (SMSF) can be part of an effective estate planning strategy but beware of the conditions of release for any payouts.

Two major benefits of having insurance within your SMSF are:

  1. The full/partial deductibility of premiums of eligible insurance policies; and
  2. Premiums are paid for by the fund which reduces the personal cash flow burden on fund members.

Total and Permanent Disability (TPD) insurance can be taken out by the fund to secure your financial future in the event of becoming totally and permanently disabled. Depending on the type of TPD insurance taken out, premiums may be partially or fully deductible to the fund.

In order for proceeds from an insurance payout to be released from the SMSF, members will need to satisfy a condition of release such as permanent incapacity or terminal illness.
Although traumatic events including long term illnesses may be serious, the members’ condition may not satisfy a condition of release, hence any compensation proceeds may be trapped within the SMSF until the member reaches an aged based condition of release (55 years at the earliest).

Assess whether taking out insurance through your SMSF is the best strategy.  The SIS Act places strong restrictions on the payout of insurance benefits, in particular TPD and trauma insurance.