Insurance in SMSFs must be considered

Holding insurance inside self-managed superannuation funds (SMSFs) is not a legal requirement however trustees must consider holding insurance for its members at the very least.

Previous reports into Australia’s SMSF sector have found that fewer than 13 per cent of SMSFs hold insurance on behalf of its members, Colonial First State FirstTech senior technical manager Craig Day told InvestorDaily.

“It’s not a requirement to hold insurance with an SMSF but it should be a requirement to think about it,” he said.

“The Cooper Review made the recommendation to the government to change the requirement because the level of insurance inside SMSFs was less than large funds, so it’s about understanding the reason behind that.

“All we really want is for trustees to ask the question, ‘do we need to hold insurance’ and if it’s not the case, that’s fine because [at least it was considered] at the end of the day.”

In many cases, insurances were held outside of super and as new SMSFs were established, many existing insurances outside super could not be moved, Mr Day said.

“They might be acquiring a new policy, then there may be new underwriting and new premiums, plus changed health circumstances may not make it possible to get that insurance, or it may be a lot more expensive,” he said.

Regarding whether investors were attracted to using SMSFs for the right reasons, there were still many that were going into the structure where it may not be the most appropriate vehicle, Mr Day believes.

“That’s still very much the case. When you look at the marketing of SMSFs, it’s pretty pervasive but what we’re seeing is that clients are coming in with an awareness of what a SMSF is and the structure and are asking more questions about it.”

In addition, there was a “warped perception” held by Australians that an SMSF structure delivered the benefits of a higher balance, rather than understanding that it was the investor going into an SMSF that had a higher balance, Day said.

He said many advisers he spoke with would not recommend a SMSF to a client unless their balance was close to $1 million as there were cheaper options without the additional cost and responsibility.

Via http://www.investordaily.com

By Krystine Lumanta