Debt protection and insurance for self-managed super funds
With a number of changes being made to the investment rules for self-managed super funds, allowing investments in a wider range of assets including property assets, many self-managed super funds have a large percentage of assets tied up in a single investment – leading to lack of liquidity.
Appropriate insurance coverage becomes especially important when SMSFs look at property investment and have debt. Often investors overlook the need for insurance cover when they establish a SMSF and they may not be aware that any existing cover they have with an industry fund or retail offering may be lost.
The unexpected payout of a member’s benefits (due to a member’s death or total and permanent disability) could leave the SMSF facing a liquidity crisis. Without appropriate insurance in place, assets such as property within the SMSF may need to be sold to pay out member benefits. This could have a number of devastating effects including:
- Property assets are sold under pressure to pay back loans which may result in low realisation values, and potential loss of income from property asset;
- Total and permanent disability of a member results in access of 100% of superannuation benefit as a lump sum which effectively wipes out the fund; as well as
- Delays in payment to beneficiaries due to time to liquidate assets.
- Some insurance policies may not be tax deductible when owned by a SMSF, as opposed to personal ownership;
- Future changes in place from July 2014 mean that “own occupation” TPD insurance where benefits are paid if the insured is not able to work in a similar occupation to their current job;
- New trauma policies will not be able to be purchased from July 1, 2014 so if this coverage could benefit you, this will need to be in place before then;
- Could self-insurance be a more appropriate option due to age or illness?;
- Do changes to rules to do with artwork and collectables affect your fund? These funds will need Insurance for these assets to be in place before 1 July 2016 to comply with the changes;
- Property insurance should also be a consideration for SMSFs investing in property.
