Insurance, Regulation, SMSF

Insurance consideration ineffective

Life insurance SMSF Liability Investment strategy

The number of funds holding life insurance appears to not have increased significantly since the introduction of a requirement to consider these policies as part of a funds’ investment strategy.

A requirement for trustees to consider purchasing life insurance as part of an SMSF’s investment strategy, introduced in 2011 following the Super System Review, has had little impact on the number of funds holding these policies and any actions to address it, according to an industry specialist.

“I speculate whether this change in law back in 2011 has actually resulted in any increase in the level of insurance being held by SMSFs because a lot of people tend to say they don’t need it and move along. They don’t actually give it any consideration,” Colonial First State head of technical Craig Day told attendees at The Tax Institute’s recent Super Intensive.

“When I went back and looked at the stats, only 13 per cent of SMSFs had life insurance back then. I’ve looked and I cannot find data to suggest how many SMSFs have insurance today. I even called Peter Burgess at the SMSF Association and he said there are no current statistics on this.

“I do wonder whether this recommendation has just ended up being a tick-a-box process where people tick the box to include this wording in their investment strategy and say ‘yes we will consider the need to hold insurance’, but it actually hasn’t resulted in an increase in the level of insurance being held.

“It is a trustee duty and obligation, a legal requirement to [consider insurance in an SMSF]. What you should be doing at that point in time is stopping and having a conversation with the client to say: ‘Do you realise that this is a trustee duty or obligation?’”

Day added this aspect of the advice process was particularly important given both trustees and advisers may face substantial liability risks if a sudden death occurs and they have not considered purchasing an insurance policy.

To illustrate his point, he gave an example of an SMSF with a trustee’s son as a member who died suddenly due to an accident and had no insurance in the fund as the trustee had not previously considered insurance.

“That daughter-in-law that you never really got along with, all of a sudden their quality of life has just gone through the floor because the trustees failed to comply with their legal duty to consider the need to hold insurance,” he said.

“As a result, the daughter-in-law is now having to pull the kids out of private school or having to sell the home. [They] may take the view that they’ve suffered significant financial loss because you failed to comply with the trustee duty and therefore there is now an action of liability against the trustee.

“We’re not talking about a $1500 fine here, we’re talking potentially millions of dollars of liability depending on the circumstances.

“So that’s why I talk to advisers to make sure the client understands that it is now their obligation because if something does happen, the lawyers will want to come back and look at the advice that was provided.”

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