Self-Managed Super Funds (SMSFs) can hold insurance for their members — but the rules, practicalities, and cost implications differ significantly from the group insurance available in industry and retail super funds.
What Insurance Can an SMSF Hold?
An SMSF can hold insurance for its members under the SIS Act, provided the insurance meets the sole purpose test — i.e., it is maintained to provide retirement benefits.
Allowable insurance types:
- Life insurance (death cover)
- Total and Permanent Disability (TPD) insurance — “any occupation” definition only (own occupation TPD cannot be held in super)
- Terminal illness insurance (often incorporated in life cover)
- Income protection / salary continuance insurance — allowable but must meet SIS conditions
Note: Income protection insurance is not permitted to be funded using borrowing inside an SMSF.
How Insurance Inside an SMSF Works
Unlike industry and retail funds (which arrange group insurance covering all members automatically), an SMSF trustee must:
- Source the policy directly from an insurer — the SMSF is the policy owner, and the member is the life insured
- Pay premiums from the SMSF bank account — premiums must come from fund assets
- Claim proceeds go into the SMSF account — not directly to the member or family (the trustee then distributes as a death benefit)
- Underwriting applies — there is no automatic acceptance; the insurer will assess health, lifestyle, and occupation
Key Differences From Industry/Retail Fund Insurance
| Feature | Industry/retail super group insurance | SMSF insurance |
|---|---|---|
| Automatic acceptance | Often yes (default cover) | No — full underwriting |
| Pre-existing conditions | Often covered in default cover | Subject to underwriting exclusions |
| Pricing | Group rates (may be competitive) | Individual retail rates |
| Administration | Fund arranges | Trustee arranges separately |
| Cover type (TPD) | Any occupation or own occupation (retail) | Any occupation only (inside super) |
Is SMSF Insurance More Expensive?
Typically yes — particularly for life insurance and TPD. Industry super funds benefit from group rates negotiated across hundreds of thousands of members. An SMSF member purchasing individual retail policies will generally pay higher premiums.
For some members (young, healthy, non-smokers), the pricing difference may be modest. For older members or those with health conditions, group rates available in industry funds may be significantly cheaper.
Tax Deductibility of Premiums
Premiums paid by the SMSF for life insurance, TPD, and income protection are generally tax deductible by the SMSF (reducing the fund’s taxable income at 15%). This is consistent with the treatment of premiums inside industry and retail funds.
When Does Insurance in an SMSF Make Sense?
- You want more control over your policy terms
- You have specific insurance needs not met by industry fund group cover
- You want “own occupation” TPD — but note: own occupation TPD must be held outside super as a retail policy
- You want very large cover amounts that exceed group cover limits
The PYS Rules and SMSFs
The Protecting Your Super (PYS) package — which cancels insurance in inactive accounts with low balances — applies differently to SMSFs. SMSFs are not subject to the same automated ATO transfer rules as APRA-regulated funds. However, SMSF trustees still have obligations to act in members’ best interests.
For more: SMSF Guide, Group vs Retail Insurance, TPD in Super. For SMSF insurance advice, speak with a licensed SMSF specialist. Find an adviser via MoneySmart.