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Document client’s insurance refusal

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Instances of SMSF members opting not to discuss their insurance needs should be recorded in their file notes rather than being glossed over to prevent later disputes.

The members of an SMSF may have good reasons for not holding life insurance via their fund and advisers should be documenting those reasons to prevent disputes, an SMSF specialist has warned.

BDO private wealth and SMSF senior consultant Peter Crump said these reasons may include holding cover through a retail or industry fund, being unable to secure cover due to pre-existing health conditions, holding a policy with terms and conditions that will be lost if transferred into an SMSF or holding a policy outside the fund for tax management reasons.

However, addressing attendees at last week’s SMSF Association National Conference 2022 in Adelaide, Crump said a poor reason for not holding life insurance inside an SMSF was because it was not addressed with SMSF trustees and members.

“Let’s tease that conversation out rather than just let it sit there and act as a ticking time bomb,” he said.

“It is very hard for those of you who aren’t licensed advisers to have that conversation, but then it also becomes hard to join an adviser to the work that you’re doing, but there’s an ongoing potential risk in this area.

“There will be aggrieved beneficiaries who say: ‘I’ve got a document here that said my parents did not need insurance and the trustees considered it. Show me where was the consideration because they had a profound need for insurance.’”

He said the absence of conversations about life insurance needs will become an issue for regulators and auditors, who will also start to request evidence of why cover was absent.

“Over the next five years we won’t just see the investment strategy being subject to greater scrutiny through the audit process. The insurance element is likely to have the same degree of scrutiny,” he said.

“So, have you had a discussion and where is the trustee minute that showed there was a discussion about insurance to enable that statement to be made in the investment strategy? I am not saying this to make work for people, but to acknowledge there’s a substantial liability issue sitting here.

“It is important that there is a genuine discussion around the need for insurance that you can refer to an adviser, but you don’t need to actually go through the whole process of evaluating it yourself to have that conversation.

“If the member says ‘I don’t want insurance, I don’t want to have that discussion’, that is a good protective process for you to note that and put it in your file note as to why the trustee determined that the members didn’t have a need for insurance inside the fund.”

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