There’s a lot to consider
Whilst there is the additional advantage of alleviating pressure on your cashflow by holding your Income Protection cover in your SMSF, subject to your personal circumstances it may be more beneficial to own the policy personally due to the vast disadvantages of owning it within a super fund:
A more complex claims process – When making an income protection claim you will be required to first have the claim processed by the insurance company and then also by the super fund itself. Trustees of superfunds have an obligation to ensure that all funds released from super satisfy a condition of release. The Superannuation Industry Supervision Act (SIS Act) states that in order for a member to receive a replacement income stream from super, they will need to satisfy the temporary incapacity condition of release. This is contrasted with a policy held outside of super where a claimant simply has to meet the insurer’s requirements.
A simpler, less comprehensive product – Superannuation legislation states that income protection held inside super is only able to offer protection against a defined loss in income. In order to access the various additional benefits present in high quality Income Protection products owned outside of the superannuation environment, some retail insurers offer a “split” policy that will enable you to receive these benefits under a linked policy held personally. The benefits that you cannot be paid under a policy held in your SMSF include a trauma benefit (pays you a lump sum upon being diagnosed with one of a number of diseases) and a specific injuries benefit (pays you a lump sum should you suffer one of a number of injuries).
Indemnity contracts – Income protection held inside an SMSF can only be an indemnity style policy. What this means is that, at the time of claim, you will have to prove to the insurer that immediately prior to disability, you were earning sufficient income to justify your monthly benefit. This presents a significant hazard if you are self-employed and your income fluctuates or if, for any reason, you are earning less money than you were when you set up the policy.
Preventing payments of other insurance policies – If you have Total and Permanent Disability insurance owned inside your super fund as well as your Income Protection insurance, in the event of a total disability, you cannot claim on both your Income Protection policy and your Total and Permanent Disability policy. As previously stated, due to the SIS Act, one of the conditions of release for Income Protection is temporary incapacity; and as you cannot be temporarily incapacitated and permanently incapacitated at the same time, you cannot claim on both of the insurance policies.
Wasting your contributions cap – With a reduced concessional contributions cap comes a greater responsibility to use it most effectively. Income protection premiums that are funded personally are generally fully tax deductible, often making the tax effectiveness of personal and super owned policies the same. By paying your premiums personally, you could well be freeing up space in your contributions cap to make additional tax effective superannuation contributions.
Using your retirement savings – Your superannuation is in place to provide for you in retirement and it should be treated as such. Funding your income protection policy with your super, without topping up your super in a similar fashion, could result in your retirement savings being depleted.
It’s important to carefully consider all the pros, cons and tax implications of insurance options before deciding whether or not to have cover in your super fund. At the end of the day, it’s different for everyone and comes down to determining what’s best for you.