Podcasts
Gareth Lane
Ashwin Ramdas
Updated Dec 20, 2022
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Welcome to SMSF Mate. Our general advice warning. We are required to warn you that any advice has been prepared without taking into account your objectives, financial situations or needs and because of that you should before acting on any advice consider the appropriateness of the advice having regard to your own objectives, financial services and needs. Where the advice relates to the acquisition or possible acquisition of a particular financial product you should obtain a product disclosure statement relating to that product and consider the PDS before making any decision about whether to acquire the product. Now let’s get into it.
Tim: Welcome to SMSF Mate’s Podcast. SMSF Mate is where Aussie mates come together to get the most from superannuation and learn how to manage their retirement savings as best as possible. My name’s Tim and I’m here with?
Gareth: This is the Gareth voice reporting for duty.
Ashwin: This is Ashwin.
Tim: Awesome. Today, we’re going to talk about insurance options within SMSFs and outside of SMSF and the various considerations that go along with that so welcome.
Gareth: Insurance, dirty word. Is it a dirty word?
Tim: For some.
Gareth: For some. I think insurance is so many different types of insurance you can have for lots of different parts of your life. You can have cars, boat, house, health. You can insure anything in theory right? I guess when you’re thinking about super and non-sort of self-managed supers. Most funds i think include insurance kind of by default is that right?
Ashwin: A little bit. The laws have changed on that side of things. A whole bunch of letters have gone out to people with the insurance policies within their funds to review. Sometimes they’re cancelled if there’s low balances and things around that. It is up to each fund. I guess the thing I would say is you start off with what just like you do with the car insurance or the or the boat insurance, if you’re lucky enough to have a boat.
Gareth: Not usually. Budget out another thousand is what boat stands for.
Ashwin: Definitely. I reckon it comes back to what you’re trying to ensure. It’s easy with health insurance to sort of work out what you’re trying to cover yourself for and what it includes. Life, income, protection, trauma insurance, all those insurances are around your specific events that happen in your life. Some insurances can be held in super, some can’t. Trauma for example is held outside of super while income protection and life insurance and TPD could be held within your super fund but sometimes it’s advantageous not to have it in your superfund.
Gareth: TPD is total permanent disability.
Ashwin: That’s the key one is sometimes why you might have it in super and not in super is definitions but even around that the changes and the definitions within funds have actually changed recently I think around October around income protection but you can go do your own research and see an advisor but it starts off with the need. Gareth had exciting news of late.
Tim: Congratulations Gareth.
Gareth: Absolutely. We brought a new car but feels like it. Our little four week old makes you sort of consider life on a different premise. Insurance, for me is something that I kind of believe you’re insuring against something may be happening and basically you’re taking a punt or the insurance company is taking a punt on you and whoever’s right wins kind of in the end. That’s a very young person attitude I think. Ashwin’s rolling his eyes at me.
Tim: That’s an attitude pre-kids.
Ashwin: I think for me personally when we had our boys, we had the first one AJ it was okay, all of a sudden it’s not me and Jody. It’s not two adults trying to protect ourselves. We’ve got a newborn that’s going to need certain amount of money throughout his life and if something happened to me…
Gareth: How are you going to fund it?
Ashwin: How are you going to fund it? That’s when most people do see an advisor to go get the insurance advice and get the right level of insurance. Where I think it sometimes falls down is people don’t change that policy. You might say, let’s say for argument’s sake it’s a million dollars. It is the number you come out with which is your what you need the day bub’s born. What happens a year later if you made some money or you’ve earned a certain amount and there’s more money on mortgage or etc. your life changes and what people normally don’t do is go in and see their advisor for a review and adjust the insurances.
For me, I’m at my highest insurance point right now. I’ve got two kids under five. I’ve got actually one that’s five and one that’s three. Until they’re both a bit older I’m going to need this level of insurance because there’s a certain amount of years that I want enough money that Jody doesn’t have to stress about work. The house is paid, etc. for some people might be they don’t need that much because their kids are older. We don’t need that level of insurance. Where people get mistakes is they take out that one million dollar policy. They dot and they don’t change it till they’re 60.
Gareth: Just to flesh that out a bit so the idea or at least my understanding of it is that your million dollars is to fund your children until they’re basically capable of looking after themselves in the event that you either pass away or become…
Ashwin: Yes so whatever the event is.
Gareth: You lose your income.
Ashwin: If it’s TPD, it’s if I’m permanently disabled by the definitions of that policy.
Gareth: And unable to work effectively.
Ashwin: Unable to work then there’s the lot, obviously death. I’m no longer here. Then there’s income protection. All of those policies individually will have its own definitions.
Gareth: In simple terms the idea is that the insurance company pays your estate if you like let’s say a million dollars. Then your kids will have a million dollars to sort of…
Ashwin: My wife…
Gareth: Or your wife does.
Ashwin: I wouldn’t trust a five-year-old and a three-year-old.
Gareth: That opens up a whole new thing about who the trustee is.
Ashwin: Insurance policies have who owns it. I’ve got a business and the other business partner associate in there effectively has an insurance policy on me. In case I pass she’ll get paid out to pay my wife for the share of the business. The business continues. Employees don’t lose their jobs or the rest of it.
Gareth: Sounds like a topic for another podcast.
Ashwin: My concern is if my wife’s not an accountant she would not add any value to the business and would be in a bit of trouble.
Gareth: The business ends or in theory it can’t do what it normally is doing.
Ashwin: Exactly. This will give enough money for that person to find another accountant to come into the business and continue running as is. That’s the plan in my head but that’s all the different types of insurances that exist. That’s outside of super. You can have some in super up to each individual of how they do it but the key part is you really want to see an advisor because the product disclosure or the level of information in those insurances are pretty huge. Some people go to on our website to see a price. That’s a guide but you get loadings based on your health or your disclosures so at the moment I’m not sure if the camera’s showing it but it added about 20 pounds here. That’s an extra 50% loading on paying on a couple of my insurance plans because of the weight. It is reviewable. If I lose the weight I can go in for a review and the premium will drop.
Gareth: It’s a lot more complicated than going online and getting some car insurance.
Ashwin: Car insurance, fairly straightforward. Again, you still have to read the product disclosure documents but it’s general in nature and it’s common in there. There’s certain things that might not be covered in your policy if you’ve got a family history of heart issues and things like that. They may either put a loading on it or they might even take it off as a restriction but if you don’t disclose it you’re not. The key thing is do it when you’re fit and healthy because there’s generally not a review again once the policy is in place but you should also every few years review the level of cover. If the level of cover is still a million dollars but you just won lotto, you probably don’t need it anymore. You have people call you all the time going why am I paying this premium? You’re making that option to pay the premium. It will pay out if you meet the conditions of the insurance but do you still need it.
Gareth: I think obviously you’ve also got to kind of consider your lifestyle. Certain people live in different ways. I guess if you have a million dollar house with a 500,000 mortgage and then you want your kids to live in the same house then you need to be able to pay the 500,000 somehow but then if you live in a 10 million house with a 5 million mortgage assuming you can do that. Same applies right? That number really probably needs quite a bit of thought.
Ashwin: Exactly and the best place to go is you can, there are guides on certain websites to help you do a diagnostic effectively to work out what your level of insurance is but if it was me personally and that’s what I would see a financial advisor, sat down. We sort of worked out the numbers and then they handled the application process. Obviously, I did disclosures.
Gareth: So they know what to ask and how to structure it.
Ashwin: The blood tests or the rest of the test that they needed and then go from there.
Gareth: From a self-managed super fund point of view you don’t have to have income protection and total permanent disability and life insurance in your super fund but you can choose to have either or both in or out.
Ashwin: There’s no requirement to have insurance but you’ll find every super fund will have a disclosure around you’ve considered insurance every year and you’ve decided either to do it or not to do it because it is a point to make a note to do it.
Gareth: It’s the government’s way of kind of making sure you’ve kind of thought about it in a way.
Ashwin: To be honest you should because your mindset Gareth, might have changed a fair bit since Bob.
Gareth: I certainly learned some new words.
Ashwin: Most people take the event of a child to go and get their insurances done. They just don’t do the follow-up and a review and keep keeping an eye on it.
Gareth: They sit in the set and forget pile. Meanwhile they’re paying substantial…
Ashwin: Amounts and the premiums aren’t huge when you’re young. It just creeps up as you get older. That’s when people start oh, why do I have this insurance? They go well, actually I need that insurance when the kids were X. I don’t need the same level insurance. Maybe from a million dollars it goes to 800.
Gareth: Sort of scale it down over time.
Ashwin: You scale it down and you can probably keep the premium the same. Technically you can also do a level premium. At the start of your insurance application it’ll be the same premium effectively each year.
Gareth: Maybe you could expand a little bit on the difference between say income protection and total permanent disability.
Ashwin: Totally impermanently.
Gareth: Because it kind of sounds similar in some respects.
Ashwin: A little bit. A TPD is a lot harder to meet the criteria. You’ll be totally and permanently disabled.
Gareth: Car accident, jump off a building, pushed off a building, probably could jump off a building. Maybe not the same.
Ashwin: It depends also on the policy of what’s covered in there right so but…
Gareth: Before anyone gets any crazy ideas.
Ashwin: It’s the outcome but the key thing is in TPD there’s a definition called own occupation or any occupation. If that’s still around you’ve got to go through your policies and say, do you need that policy. Let’s say for example if you’re a heart surgeon you might have damaged something but you’re still able to work in other roles.
Gareth: You could be a GP but not a surgeon.
Ashwin: Yes then you might not be paid out. It comes back to making sure you’ve gone through the process of going are you covered for your specific occupation or any occupation. That’s sometimes what makes policies cheaper and for some people any occupation is fine but for other people they might want own occupation if it’s available and you go through those processes and see what’s around.
Gareth: I guess the key is really in the name total permanent disability.
Ashwin: Well income protection could be temporary. You could do your, let’s say you’re a tradie. You do your knees. You’re out for 12 months. You’ve got a policy that might pay you for that 12 month period or the two years that it takes to recover.
Gareth: Protecting your income.
Ashwin: You’re predicting your income to a certain percentage. That’s the key side of it. Very different policies.
Gareth: Can you have both?
Ashwin: You can have all three. There’s also another insurance called trauma but that’s usually it’s held outside of super and that’s for a traumatic event. Something that meets that criteria you’ll get paid out on that premium.
Gareth: In summary, the income protection, total permanent disability.
Ashwin: Death and there’s a trauma.
Gareth: And then trauma. You can have any one or any mix.
Ashwin: Yes. Your financial advisor will sit down with you and go hey, these are the events you’re trying to protect yourself from. You can always elect not to do it.
Gareth: Is it possible to do it yourself?
Ashwin: It is but you’ve got to read through those PDS’s.
Gareth: You might pay a premium to see your advisor but your advisor knows the loopholes and well not necessarily the loopholes but the…
Ashwin: They know what you need to declare but they also know what policies might be best suited for your occupation. There’s sort of insurers that prefer medical people, certain insurances that prefer other people might give you discounts but ultimately they also know they’ll take you through that initial step of working out what you might need. You might not be able to afford what you need and then you make that informed decision to scale it down because that’s where I started. You want to know what you need then you go can afford that?
Gareth: Can you afford it?
Ashwin: And then play around.
Gareth: Is it tax deductible?
Ashwin: Depending on the insurance and how it’s held, yes. It’s all up to each.
Gareth: It’s a bit more complicated than it sounds.
Ashwin: It is very, I went and saw an advisor for the piece. I could have muddled my way through and applied myself but going through an advisor gave me the peace of mind that there was someone else who’s checked it. Also had a discussion with my wife. We both understand what we’re trying to achieve.
Gareth: I believe Tim has an excellent article on our website about this. Isn’t it?
Tim: There is. We’ve just put it up recently. It runs through all the different types of insurances as we’ve discussed. Considerations for inside super, outside super, tax benefits related to each one. Check it out.
Gareth: And it’s free to read. No pay walls exist. There’s a disclaimer but there’s no pay walls.
Tim: On the income protection side is there a benefit for having it within say your SMSF or is it better to have it outside from a tax perspective.
Ashwin: From a tax point of view obviously most people have a higher tax rate outside of super fund. If your fund, if your insurance is tax deductible, the income protection then effectively it would be worth more of a tax reduction outside but also conversely when it gets paid out it’s going to be accessible income in your own name. It balances out. Personal view, it really comes back to more the definitions more than the income tax decision. That’s really why you want your advisors to go okay, is the definitions or the types of policies available restricted because they’re in super versus policies i could have outside of super because there’s certain definitions, certain terms that insurers might not be comfortable having or not allowed to use with a super funding policy. That’s why you go through it.
I’m not labelling it this way but it’s sort of what happened in the royal commission was they labelled a lot of insurances potential junk insurances. That’s where a lot of fines came out to people is well these insurances really weren’t worth the money they were written on or the paper they were written on. You would take the view that’s why you’re an advisor. Someone that actually knows hey, that’s the insurer. This is their definitions. This is maybe the rate of claims that they pay out. I’ve handled claims with that insurer. All of those questions are the key part. Insurance is only as good as well, when I need to make a claim. When you ask the question to an advisor hey, if i go with X insurer have you had claims with them? Have there been issues and the answers look, most times I’ve been fine. It’s easy enough to navigate through where they go, no. That one might be cheaper but the process to make a claim has been difficult in time. That might be their experiences but that’s the person you’re getting advice from. I would go through that person that’s handled claims versus Mr. Google and I found the cheapest one because if it’s no good when you make the claim. You don’t have an advisor that’s going to be making the claim for you. You’ve got your grieving partner trying to manage an insurance claim for you which I don’t know.
Gareth: Quite a bit more serious than a car insurance premium that might pay out 50 grand or something these policies may pay out millions of dollars so there’s going to be a bit more research.
Ashwin: Some financial advisor will charge a fee. Some will take the commission from the premium but ultimately they’re there to navigate your needs when you need it. It’s effectively a fee-for-service scenario.
Gareth: It sounds like you really want to do your research on the advisor to make sure that they’ve got some experience and credibility long term. If you see someone who maybe won’t be around in five, 10, 15 years. How does that work?
Ashwin: Look, I think the five, 10 years potential is let’s say it’s an older advisor you’ve seen. It might be a concern but also that person’s also got a wealth of knowledge over years.
Gareth: That’s a bit of a trade-off.
Ashwin: It’s the trade-off but ultimately they will sell their practice obviously prior to retirement. That insurance will still be in place.
Gareth: It’s not connected to the advisor.
Ashwin: Your insurance will be their insurance. If a new advisor changes they just add their name generally to your policy. They might do a review when they meet you to make sure it’s still the right insurance for you but they’ll go through the pros and cons with you.
Gareth: Great.
Thank you for joining us once again. If you’re interested in our waffle about self-managed super funds feel free to join us on smsfmate.com.au or search SMSF Mate in Spotify.
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