Tax & Insurance

SMSF Insurance Options: What’s Best For Your Situation?

  • Sonny RahimSonny Rahim
  • Updated Dec 19, 2022

  • Mate Checked

    This information has been reviewed by our SMSF Mates before it was published as part of our review process.

What types of SMSF insurance options are available?

Life insurance for SMSF

Life insurance and SMSFs are no strangers to one another, and even conventional industry or retail super funds have a basic level of life insurance built-in. There are many positives about having your life insurance within your SMSF, including the insurance premiums being a tax-deductible expense. By doing this, the fund is able to claim a tax deduction for certain types of insurance policies, which reduces the tax it has to pay on other income within the fund. Another benefit is that the money in the SMSF is used to pay for the insurance premiums, meaning there are no out of pocket expenses like there would be outside of super.

Australia has had rules in place since 2012 that require SMSF trustees to consider life insurance within the fund’s investment strategy and keep a record of the decision, which includes the reason that the fund decided to include or exclude life insurance. Remember, this doesn’t mean that life insurance is compulsory within the fund. It means the fund must have an insurance strategy of sorts by considering if it’s appropriate and documenting the decision for record-keeping.

There can be highly effective tax advantages from having your life insurance policy within your SMSF rather than a conventional industry or retail fund. If structured correctly, your dependants or your estate could end up with more money from the life insurance payout when compared with holding the policy outside of the SMSF.

Another interesting consideration is that many SMSFs are now borrowing to invest in property. Having adequate levels of SMSF life insurance would ensure that the loan would be repaid if a member was no longer able to work and make contributions to the SMSF for repayments.

Temporary and Permanent Disability (TPD) insurance for SMSF

The SMSF can also hold insurance related to total and permanent disablement (TPD) insurance and income protection insurance. In general terms, TPD insurance is often very specific and tailored towards the insured member’s occupation and can be referred to as an any-occupation policy or an own-occupation policy. The any-occupation policy will payout if the person is unable to work in any occupation, while the own-occupation policy will payout if the person can no longer work in their current role. In the case of SMSF insurance cover, the fund can only take out an any-occupation policy on behalf of the fund’s members.

Income protection insurance for SMSF

Income protection insurance is intended to provide cover if the person is unable to complete their usual work due to injury or bad health. Payouts are made after the specified waiting period and the benefits are paid for the period the insured person is unable to work. The amount received must not exceed the income earned by the person prior to the injury or bad health event. Usually, a condition of release is met under superannuation rules when a person has an income protection insurance policy in place, meaning the person can receive the benefit as it’s paid from the SMSF.

Retail and industry super funds typically offer some kind of income protection insurance by default but when you have an SMSF, you need to arrange your own insurance cover. The insurance can be held within the SMSF or outside the fund. If you are not able to work due to injury or illness, income protection insurance will pay up to 85% of your pre-tax income. The purpose of the insurance is to cover you for the risk of lost income if you are unable to work, and the amounts are calculated on the last 12 months’ earnings prior to the injury or illness.

This means that you will receive a similar amount of money from the insurance payout, that you would have been able to earn from working. This insurance cover is designed to alleviate the stresses of having to find the funds to pay for your everyday expenses while you are out of action. People who are self-employed and have a family or dependents are generally suited to this type of income protection policy.

Does my SMSF have to hold insurance?

While SMSF trustees are not required by superannuation law to take out life insurance cover for the fund’s members, they must consider if it’s appropriate. Specifically, the trustees must regularly review the fund’s investment strategy, ensuring that the investment strategy adequately reflects changes to the circumstances affecting the fund and its members. This means that the government now requires SMSFs investment strategy to include consideration of life insurance for its members.

Typical insurance considerations should include the type of cover—such as Life, TPD, and Income protection cover—and the insurance’s level and ownership structure. The permitted types of insurance cover an SMSF can purchase must be consistent with the superannuation conditions of release concerning disability, terminal illness and death.

If an SMSF member were to pass away, the life insurance policy proceeds are paid into the fund and then distributed to the member’s dependants or the estate as set out in the SMSF’s trust deed.

SMSF insurance deduction: Can I claim insurance premiums?

Paying for insurance inside your SMSF means that the expense could be tax-deductible, which would otherwise not be possible when paying for insurance outside of super. This tax concession is available to any super fund. Still, the ability to deduct the expense is only available to the fund itself, so people new to the SMSF space may not be aware of this benefit.

Furthermore, insurance payouts for life insurance made to dependents of the deceased within the super fund are tax-free. Insurance payouts to non-dependants can attract tax, and life insurance payouts can only be received as a lump sum.

The only insurance policies which an SMSF can enter into are:

  • income protection insurance
  • total and permanent disability insurance
  • life insurance policies

There’s an important differentiator when it comes to the deductibility of life insurance premiums within an SMSF. The rules distinguish between the insurance premiums that provide a benefit and insurance premiums that have a savings component, which is sometimes the case with some variable life insurance policies which will build a cash reserve or investment component. Understandably, there is no deduction available for this part of the policy.

Most importantly, the insurance policies must be held in the SMSF trustee’s name and the SMSF must be the sole beneficiary of the insurance policy. It’s prohibited to transfer existing life insurance policies to the SMSF, as the law prohibits an SMSF from acquiring financial assets from any related parties – an insurance policy is considered a financial asset. Another consideration for any income protection insurance within the SMSF is the occupation clause. Only any-occupation income protection insurance policies are fully deductible. If the insurance policy is classified as an own-occupation policy, then premiums are only partially deductible

Is income protection insurance tax deductible in an SMSF?

Regardless of whether you hold income protection inside or outside an SMSF, the policy is tax-deductible. If you hold the insurance within the SMSF, tax deductions will be limited to the 15% tax rate, but outside of the fund, it could be as high as 45% if you’re in the top marginal income tax bracket. With this in mind, holding the insurance outside of the SMSF could have more tax benefits, depending on your personal circumstances.

Income protection benefits paid are treated as normal income by the ATO, meaning any payouts from the insurance benefits are classified as assessable income. Any insurance premiums paid are tax-deductible but any of the benefits or payouts received from the policy are not. Determining if income protection is right for you really depends on your personal objectives and circumstances. A financial adviser can provide financial product advice and discuss if you need the insurance cover and the best place for you to hold the policy.

Insurance options in retail super or industry super funds?

Most conventional super funds (non-SMSF) will offer some form of insurance by default. Whether it be life, income protection or TPD (total and permanent disability) insurance, it’s certainly something worth thinking about before switching to an SMSF. Having your insurance within the super fund can be an attractive way to go due to the lack of out-of-pocket expenses, and they can be more cost-effective when compared to insurance outside the fund. The bad news is that if you withdraw all your super from your conventional super fund, the insurance cover will cease immediately, potentially leaving you without the cover you need.

General Advice Warning

Sonny Rahim

Premia Private

Sonny Rahim is a finance professional based out of the Greater Perth Area. He is the director and founder of Premia Private, a multi-faceted finance business with advisory divisions and expertise in the areas of Strategic Planning, Wealth Management, Investment Management, Debt and Personal Insurances. Sonny is one of the founders of SMSF Mate.

Sonny studied in the Private Markets Investment Programme at Saïd Business School, University of Oxford and also participated in the Oxford Entrepreneurship Venture Finance. He also completed a Bachelor’s Degree, Commerce (Accounting and Finance) at Curtin University in Western Australia.

As well as being a founder and managing director of the Premia Financial Group, Sonny has worked as an investment fund manager and a chartered accountant. He sits on the board of Ronald McDonald House Charities Western Australia.

You can find out more about Sonny or connect with him on Linkedin here:

Or visit his website here:

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Kind words from Aussies managing
their own self funded futures

  • SMSF Mate is a unique website because it has ideas about how to approach SMSFs, insurance and other financial topics that come straight from first hand experience. It's much more useful than what you find on all the other financial websites that just offer generic info that you could easily get on the ATO's website. It's also nice to know there's no financial incentive behind the information, it's legitimately there to help people understand self-managed super funds and how to get the most out of them, not to get an affiliate commission from a broker or other financial services provider. The investment product information is also incredibly useful, I've never seen this kind of functionality on any other website that let's you look at such a wide range of products, sort by what info is most interesting or important to you, and subscribe to updates for different funds and financial products all in one place. Definitely worth checking out if you own or are considering an SMSF!

    David G, Self-Employed, SMSF Owner
  • SMSF Mate provides a unique insight into superannuation and financial topics in a way that is easier to understand than conventional websites. The colloquial nature of the site makes it easy to understand and they often speak about complicated topics in lamens terms so I can wrap my head around them. The investment product information is a great way to research funds that I am interested in investing in with my SMSF and there is a lot of helpful information on the site for better structuring my investment portfolio. In comparison to other websites which offer similar information, SMSF Mate excels as the information is free to access whereas many other sites charge a subscription fee for the same thing. Overall, I think SMSF Mate is a great resource for SMSF trustees and is worth looking at for a variety of super-related topics. Thanks.

    Tim B, Business Owner, SMSF Trustee