A specialist adviser has warned any transfer of a life insurance policy from being held in an individual’s name to an SMSF must be performed with care due to the severe penalties that can result from errors involving these transactions.
“In the situation where the SMSF is paying the premium of an existing life insurance policy and it’s discovered that policy is not owned by the SMSF [which by law it must be], one approach might be to simply complete an assignment of that policy across to the super fund, so effectively transfer the policy across,” Accurium head of education Mark Ellem said during the actuarial firm’s technical webinar today.
Ellem explained this is not allowable under section 66 of the Superannuation Industry (Supervision) (SIS) Act for an insurance policy owned by the SMSF member or relative of that individual.
However, he stipulated a transfer of this kind can be carried out for a policy owned by a company controlled by the member and highlighted the importance of knowing this detail.
“Keep in mind the penalty for a breach of section 66 is not an SMSF admin penalty provision where [the trustee] gets hit with 10 penalty points or 60 penalty points. It’s not included under section 166 of the SIS Act for SMSF admin penalties,” he revealed.
“The penalty for a breach of section 66 is simply one year free board and accommodation at Her Majesty’s hotel – one year jail.”
He acknowledged this punishment is only applicable for intentional breaches of section 66, but nevertheless recommended advisers exercise caution in these situations.
“So just be wary of clients who have set up their SMSF who may have existing insurance policies in place and they want to transfer that insurance [policy] across [to the fund]. You just can’t simply assign it across,” he said.
In these circumstances it would be prudent to have the client explore the possibility of cancelling the existing policy and having it reissued under the SMSF’s name, he noted.