The level of life insurance held within SMSFs is being impacted by the age of members, as well as the likelihood they are holding cover outside the fund, which should be considered as part of the investment strategy, according to a life insurance specialist
Life insurance and superannuation consultant Jon de Fries said an estimate that around 15 per cent of SMSFs hold life insurance policies for their members was consistent with his experience in the sector and the age of members should be considered when asking why some do not have cover.
“The reality is for a lot of SMSF members life insurance is not going to be a valid consideration,” de Fries said in a recent presentation hosted by The Auditors Institute.
“The most recent SMSF quarterly statistical report from December last year showed that 67 per cent of SMSF members are aged 55 or over and about 30 per cent are over the age of 70.
“If you line that up against the entry ages for most retail life insurance, then it will be very difficult for the bulk of SMSF members to take out a new policy.”
He noted the entry age for income protection was 55, while for death and total and permanent disability cover, the entry age rose to 60.
“You have also got to consider the expiry ages for insurance, which is when the insurer will cease to cover the insured, and for income protection that will be 65 or 70 and the same ages apply to trauma insurance,” he said.
“While insurance is part of the SMSF investment strategy, the consideration will often be based on retention of policies rather than taking out new policies simply because of the age of the SMSF cohort.”
He noted feedback from licensees and advisers indicated many SMSF members held insurance outside their fund, which should not be overlooked by the trustee.
“In some cases, SMSF trustees or members have a second or third superannuation fund where they have cover put in place when they started employment that has automatic acceptance. It rarely reflects their individual needs or requirements for insurance, but it is better than having no cover,” he said.
“SMSF members also hold retail policies and chiefly these are income protection. Members, particularly those who are business owners, often run their income protection through the business or hold it in their own name rather than in their fund.
“The key message here is some SMSF members hold insurance in the fund, but many are holding it outside and that needs to be considered as part of the investment strategy or the insurance component of the investment strategy.”
