Insurance in superannuation

While there can be tax benefits from placing insurance in your superannuation fund, doing so with insurance that protects your business in the event of death or total disability may not be advisable.

Many businesses use insurance to fund succession arrangements in the event of death or other catastrophic events.

The widespread use of insurance has also led to brokers often recommending various types of insurance - such as life insurance, total and permanent disability (TPD) insurance income protection insurance and trauma insurance - be held within a superannuation fund to gain tax deductibility benefits.

However, the different types of insurances listed above may not be suitable to be held in a superannuation fund and care is required to ensure the insurance is compatible with your business succession planning and superannuation tax law.

Getting it wrong may lead to a failure of the business succession arrangements or a breach of superannuation law by your self-managed superannuation fund (with dire tax consequences) or both.

Tax deductibility
Tax deductions are available for insurance premiums paid by complying super funds for life, TPD and income protection insurance, where they (particularly life and TPD insurance) may not be deductible when the policies are owned by individuals.

Premiums paid by complying super funds for income protection insurance were previously only deductible if the income replacement from the insurance claim was payable for no more than two years, but the Australian Taxation Office now allows deductions for payments for temporary disability that lasts longer than two years.

There is no deductibility for premiums paid by super funds for trauma insurance, which is also known as critical illness insurance and offers a lump sum payment in the event of a range of specified medical conditions such as heart attacks.

Buy/sell insurance
Holding life or TPD insurance through your super fund to protect your family if your business folds due to death or disability is fairly straight forward where there is only one owner of a business.

However, where there is more than one business owner the continuing owners need to be protected from interference in the business by the family of the deceased or incapacitated owner, or funding a payout to the other owner from the business assets.

Where there are multiple owners, it is important that each owner has their own insurance and that there is a written agreement between the owners that covers the buying or selling of interests in the business in the event of the death of an owner.

Documentation is particularly essential where the insurance is held in a superannuation fund.

Superannuation complications
If this buy/sell insurance is held by a superannuation fund, a payout may go to the person named in a binding nomination specified in the superannuation fund or according to superannuation law, which may not cover the transfer of equity in the business to the other owners.

This situation can be avoided with properly written agreements between the owners and well-planned estate planning.

For more information, please email Kells partner and Accredited Business Law Specialist Roger Downs.