Life insurance in an SMSF requires particular attention because of the loss of benefits that may arise from not considering the member’s circumstances and debiting premiums to the incorrect account, according to an SMSF expert.
In a blog post on the SMSF Alliance website, practice principal David Busoli highlighted the importance of trustees understanding the life insurance options available to them via their funds, and the benefit of choosing between their accumulation and pension accounts when it comes to deciding where to debit their premiums.
Busoli said SMSFs would gain tax deductions for insurance premiums regardless of whether the member account paying the premium was in pension or accumulation mode, and questioned the tendency members might have to draw premiums from their accumulation account in order to maximise their exempt pension income balance.
He noted the ATO would expect life insurance proceeds to be deposited into the account that was paying the premium and this would be beneficial for members intending to pay the proceeds from the fund, but would not necessarily be ideal for members with a reversionary pension.
“Currently, if life insurance proceeds are received by a reversionary pension, they will not affect the recipient’s transfer balance account so may be retained in the pension. This represents a clear advantage,” he said.
“But, if no claim arises and the policy is eventually allowed to lapse, the pension account will be lower than it would have been had the premiums been paid from the accumulation account.”