As an accountant, you probably have a number of clients with self-managed super funds (SMSFs) who are aspiring to an accumulation of wealth after a lifetime of hard work and diligent saving.
SMSFs can be flexible and tax effective and there has been huge growth in recent years in both the number of SMSFs and the types of investments.
A lot of SMSFs now hold illiquid assets (like property) and have liabilities (like interest bearing loans) but if structured incorrectly, these investment options can come with liquidity issues and difficulties servicing loan principal plus interest following the death or disability of a member.
The value of insurance
The ultimate aim of any risk management strategy is to provide clients with the right amount of cover, so that in the event of illness or death, it will provide liquidity to the fund to allow a member to be paid their entitlement and allow the surviving members to remain in the fund. If this can be achieved on a tax-effective basis, the end result will be a great value-add for your clients.
The SMSF may be able to claim a tax deduction on the premium costs, and in addition, premiums are funded through the superannuation account balance rather than the member’s own after-tax income, which may enable the fund to offset the 15% superannuation contributions tax with the deductible premiums.
Working together
The minutes accountants prepare for SMSF clients legally need to include the consideration of life insurance. However, conducting a detailed fact find into a client’s unique personal circumstances including goals and objectives, lifestyle planning and medical history is not something you as an accountant should have to do yourself. There are two easy solutions:
- Partner with a risk specialist. This is the easiest and yet probably most comprehensive method to achieving a comprehensive risk management service for your SMSF clients. This model does mean referring outside your business but by partnering with someone you know and trust you can be confident that your client will receive the same service and high quality outcomes from your partners as they do from you.
- Employ a risk specialist in your business. The close connection between accounting and risk management makes employing a risk specialist within your business a simple way of better servicing all of your clients – and keeping them in house.
Life insurance can be a worthwhile safeguard for SMSF clients. Here is a simple checklist you can use in conjunction with a risk-specialist adviser to determine whether your SMSF clients would benefit from an insurance review:
- Carry out an asset and liability review with the client.
- Consider life, total and permanent disability and income protection insurance along with other strategies.
- Identify the cover required – this involves determining the types and amounts of insurance cover each member needs and deciding whether that cover should be held within or outside super.
- Select the methodology for allocating premiums and claims proceeds.
- Review the SMSF trust deed to ensure that insurance in the proposed format is permitted.
- Brief the SMSF auditor on your proposal.
- Ensure the Statement of Advice (SOA) is consistent with other fund documentation.
- Hold a trustee meeting and provide minutes – the trustees should document the reason/s why the decisions were made. This will provide evidence that the new legal requirement to consider life insurance for the fund has been addressed.
- Once agreed, ensure that the insurance is properly disclosed in annual member statements.
- Review the insurance annually and update it where necessary.
Craig Parker is the general manager of Affinia. He has over 20 years’ of experience in both retail and institutional banking, with a strong focus on strategic planning and continual innovation.
