We've had a few panic calls from clients.  Their insurance agent or financial planner said 'the tax office requires you to hold life insurance in your SMSF'.  The correct answer to this is 'no, not necessarily'.

What the ATO requires is for SMSF's to regularly review investment strategy, and in the review also consider whether the fund needs to have insurance cover for members - whether life, disability, or income protection.  There is no right or wrong answer, it's about what suits the current circumstances; sometimes within the fund is preferable, while outside may be better in other circumstances.

On balance, inside may be more advantageous in these circumstances:

- Pay for insurance out of the SMSF's cash flow, so both the business and you have more free cash

- Pay-outs are mostly tax effective.  If a life payout flows to a spouse or dependant under 18, there is no tax payable.  If it goes to non-dependants the tax payable is 31.5% (only if a deduction has been claimed)..

- The purpose of the ATO 'suggestion' is to ensure the SMSF has liquidity in the event of a claim for a payout, for example, the Fund may only have real estate as an investment.

- Proceeds of disability insurance through a SMSF can be a tax-free income for life.  (From 1/7/14, new policies of 'own occupation only' cannot be in a fund).

- Trauma insurance should also be kept outside super because a fund can't pay benefits unless the member meets a condition of release and can legally access their super.  (From 1/7/14, new policies for trauma will not be permitted for super funds).

The four main areas of annual consideration of strategy are:

1. Investments spread across a range of asset classes.

2. The investment objective (required return, income, growth, risk).

3. Whether borrowing arrangements will be employed to leverage assets and returns.

4. Whether the fund will hold insurance for a member or members (considering liquidity, tax situation, circumstances).

We'll be raising these issues as part of our annual review of your business and circumstances, and not because an insurance/financial planner sees an opportunity to make a sale.

Remember -  "Don't sign anything until you speak to us first!"

  The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.