Self-Managed Superannuation Funds (SMSFs) are legally required to follow an investment strategy. An investment strategy involves how your fund will obtain its financial objects by making, holding and releasing investments. A number of regulations apply to how SMSF strategies are formulated and followed.

What sort of regulations?
Your investment strategy can be flexible and does not need to specify percentage ranges or areas that your fund will invest in. In fact, trustees of an SMSF are not limited to making investments in a single area if this conforms with the fund’s investment strategy. However, it may be wise to diversify and not put all your eggs in one basket.

Using insurance as an investment strategy:
Insurance can form part of an effective investment strategy for SMSFs. However, only 13% of Australian SMSFs provide life insurance to their members. Although many believe that their SMSF can cover them in an event of crisis, they fail to consider how quickly these funds can be accessed. Property and other long term investments may not be liquidated quickly and you might need funds ASAP if a death or injury occurs. Insurance can alleviate the pressure and stress of needing to release long term investments at an undesirable time.

In addition, taking out insurance with your SMSF will effectively allow you to pay for premiums with your pre-tax income. If premiums are paid directly from an SMSF you are also unlikely to miss any payments even in times when you’re strapped for cash.

The Regulations for SMSF funds:
After reviewing the low number of SMSFs that provide insurance to their members, the ATO enacted regulations on 1st July 2012. These require that SMSF investment strategies must at least consider whether insurance should be held on behalf of their members.  Don’t worry, these regulations do not impose a minimum level of insurance or make insurance mandatory.

To comply with these regulations all SMSFs must document that they have at least considered insurance as part of their investment strategy. This can be evidenced in your fund’s investment strategy or in the minutes of trustee meetings. Make sure to document that the trustees of the fund have considered taking out insurance when you first implement your investment strategy and each time you regularly review it.

Careful! If you fail to do this intentionally you may be slapped with a penalty of up to $110,000. Not so super.

Taking out insurance with your SMSF:
If you choose to take out insurance you have a number of options. Life insurance, total permanent disablement (TPD) insurance and temporary disablement cover (more commonly known as income protection insurance) are the most common for SMSFs.

It is relatively straight forward to nominate your SMSF as the owner of an insurance policy. But don’t fall into the trap of having one of your members or relatives transfer their insurance to the superannuation fund! This will contravene the golden rule that prevents SMSFs from acquiring assets from their members and relatives.

What tax deductions are available? Platinum members read on to find out what tax deductions are available for different levels of cover…

In summary, if you are an SMSF member it is worthwhile considering whether insurance should form part of your investment strategy. The carrot: There are a number of benefits for you such as alleviating the stress of having to liquidate assets in a time of strife and being able to use your pre-tax income to pay for insurance premiums. The stick: If you don’t at least consider insurance policies in you SMSF strategy you are liable to heavy penalties.

All sounds like a hassle? Law central will take care of this for you. Use our Self-Managed Superannuation Fund Investment Strategy to make sure you comply with all the regulations.

Related Documents

• Self Managed Superannuation Fund
• Investment Strategy for Self Managed Super 2012/13