SMSF and Your Business
Episode 5 - Your business, your insurance and your SMSF
Gemma Dale: Welcome to SMSF and Your Business. In this series, we’re talking about self-managed superannuation funds (‘SMSFs’), their advantages and disadvantages and strategies that are specifically designed to allow business owners to supercharge their retirement savings. In this short video, we’re going to talk about one of those topics that’s often ignored, and that’s personal insurance. I’m Gemma Dale and I’m the Head of SMSF Solutions at NAB.
One of the more attractive features of superannuation, including SMSF, is that it allows you to hold personal insurance in a tax effective manner. Most people don’t enjoy talking or even thinking about insurance, but we all appreciate on some level that an untimely illness or injury or the death of a loved one can catastrophically impact your finances, and your lifestyle.
Insurance can’t take away the emotional distress of the hardships that life can throw at us, but it can substantially reduce the financial impact. If the worst happens knowing that you don’t have to worry about losing your business or your house, can give you time and the breathing room to focus on your recovery. Insurance can be complicated, so I’ve invited Peter Hogan, one of Australia’s leading SMSF and financial planning experts, to explain it for us.
Hi Peter, great to talk to you again. So today we’re talking about insurance, can you talk me through the core types of insurance that a business owner might like to think about.
Peter Hogan: Well, Gemma, there are a variety of insurances that a business owner can purchase to reduce the financial impact of a health problem, for example on their business and on their personal situation. There are four core types of personal insurance, and then there are some business insurance options also.
Gemma Dale: Ok so take us through the core types of personal insurance.
Peter Hogan: Firstly, there is death cover or life cover as it can be known. This is a very simple cover, which pays a lump sum when someone passes away. It’s used to provide a benefit to loved ones, who would be financially impacted by a death. So if you have a spouse and children who depend on your income and you have a mortgage for example, you’ll probably consider taking out cover to pay off the mortgage and provide them with income in the event of your death.
Gemma Dale: And tell us about the second type.
Peter Hogan: Often people couple death cover with what is called total and permanent disability insurance or TPD. This also pays a lump sum, this time in the event that you can never work again in any job you’re reasonably qualified for. So a butcher who lost the use of his arm for example, may not be able to work again. He would expect to lose his income, and so might make a TPD claim which could be used to pay out any debt or provide some capital to make any modifications that might be required for his home, for example.
Gemma Dale: And these two types of policy pay a lump sum and they’re often linked?
Peter Hogan: That’s right. There are two other common types of personal insurance. The other type of lump sum cover is known as trauma insurance or critical illness insurance. This pays a set amount if you suffer a specific health incident such as a heart attack, stroke or cancer. People often use this amount to ensure they get great medical treatment and to cover any expenses while they recover.
Gemma Dale: That could be very valuable. It covers very common ailments in health condition?
Peter Hogan: Exactly. And finally there is income protection insurance. It pays a specified proportion of your income, usually around 75%, while you’re off work due to illness or injury. This helps meet your living expenses and so on while you recover.
Gemma Dale: Right, so all of this would go a long way to ensuring, no pun intended, that the person insured feels confident that they’re going to be ok financially if something bad happens. So tell me how does all of this relate to superannuation?
Peter Hogan: Well, Gemma, you can hold quite a lot of this insurance inside superannuation; life, TPD and income protection policies can all be held inside super, which means the super fund pays the premiums, and can even claim a tax deduction for the premium as a tax deductible expense.
Gemma Dale: Right, so that makes those types of insurance a lot more affordable if the premiums feels a bit high. So what about insurance for trauma? You can’t hold that in super?
Peter Hogan: No, it used to be that you could hold trauma inside super, but the ATO has reviewed its position and now you really have to hold that outside.
Gemma Dale: Ok, now there are also some really valuable types of insurance that are specifically for business owners also. Tell me a bit about those.
Peter Hogan: Running a business is often a huge personal endeavour and for many owners, their business would cease to operate if they or one of their business partners was unable to work due to illness or injury. So the types of insurance are often the same – life, TPD and so on. But they can be structured in such a way that the payments are directed to the business, rather than the individual or loved ones. Alternatively if the business owner dies, there will be a payment made to the family of the business owner. So the business partner doesn’t need to sell all the assets to pay them out. There is also business expense insurance, which covers those expenses during the period the business owner is unable to work.
Gemma Dale: So there’s a lot to consider with business insurance and I’m guessing it gets a bit more complicated when there’s more than a single business owner involved.
Peter Hogan: Yes, absolutely, it’s essential that you involve a really experienced solicitor and a business insurance specialist when you’re structuring these arrangements. That said, don’t dismiss it all as too hard, they are absolutely worth the time and money as they can ensure the business can continue to operate in the event of an adverse event.
Gemma Dale: It was possible to hold the insurance for some of these arrangements inside super. Is that still possible?
Peter Hogan: No, it’s no longer possible to hold business insurance inside super. This is quite helpful as it becomes really clear what each type of insurance is held for. Your personal insurance, that is there to protect you and your family which you can hold outside or inside super. And your business insurance which you can only hold outside super, and is there to protect your business and your business partners.
Gemma Dale: So there are a lot of things to consider when taking out insurance. How much do you need? Should you hold it inside or outside super? What sort of key considerations would you suggest people keep in mind?
Peter Hogan: There are lots of tools to help you determine how much super you need, or you could see a specialist such as a financial planner who will help you take all of the important information into consideration. When it comes to holding insurance inside or outside super, there are additional tax considerations. And your superannuation can only be paid directly to certain people when you die. So it’s important to understand those issues before making any decisions.
Gemma Dale: Thanks so much for your time today Peter.
Peter Hogan: Thank you
Gemma Dale: As we’ve discussed, insurance is essential if you’d like to have peace of mind for yourself, for your business and for your loved ones. If you would like to know more, or if you would like to make an appointment with one of our specialists, go to nab.com.au/smsf.