In our previous newsletter, we addressed five common errors in Self-managed Super Fund advice. We also included some frightening statistics surrounding the level of trustee knowledge, and the adviser’s role in the advice process.
It’s been a requirement since 2012 for trustees to consider the insurance needs of its members.
Surprisingly however, the ATO has reported that only 0.25% of SMSFs hold insurance.
There are a couple of reasons for this number to be so low. Some members may hold cover outside of their fund or pay for their policy via rollover. In this case, the SMSF would not retain ownership of the policy. However, it may be that some members lost their cover when rolling over and were not aware of its loss.
I believe that insurance should be one of the first matters discussed when considering an SMSF, especially if there are multiple members within the fund.
The urgency increases if the SMSF has a more complex investment strategy or includes limited recourse borrowing arrangements. In my experience, competent advisers lead a robust discussion about insurance insurances and ensure that the trustee(s) with enough information to make an informed decision.
In this article, I’ll explore common approaches and the key considerations ASIC noted in Report 337: “SMSFs: Improving the advice given to investors”.
“It’s too late, baby. Now, it’s too late.
Though we really did try to make it.”
— Carole King, “It’s too late”
All too often, we are directed to the disclosures within the advice document when an adviser has failed to meet their obligations. The problem with this approach is that it is too late in some cases.
Insurance needs must be considered and addressed prior to providing the SMSF advice.
It is a critical element in the overall strategy and has the potential to affect the client decision to set up the SMSF in the beginning. Furthermore, depending on the product provider and reason for the cancellation of insurance, re-instating insurance policies is often a fruitless endeavour and the client may not be able to obtain insurance anywhere else.
- Address the client needs prior to the recommendation of an SMSF;
- Determine and discuss the current levels of cover;
- Include the future needs;
- Assess the ability of the client to obtain additional or alternate insurance;
- Discuss the potential increase in costs, loadings, exclusions or refusals; and
- Explain the potential difference in terms if a potential move is appropriate from an APRA regulated fund.
“Providing general or educational information in an SOA is not a substitute for providing appropriate personal advice recommendations.”
— – ASIC Report 337: SMSFs: Improving the quality of advice given to investors
When an adviser identifies a need for insurance it needs to be addressed prior to setting up the SMSF.
Depending on the scenario, there may not be a need for insurance advice, but accurate discussion and scoping is essential.
A client may have existing insurances elsewhere, or they may be retired, and circumstances do not dictate a need for it. Either way, it needs to be made very clear what is and isn’t within the scope.
- Uncover the reasoning behind the decision of the client to decline of insurance advice;
- Confirm client instructions;
- Clearly explain the risks;
- Assess the suitability of their desired approach; and
- Use professional judgement.
3. Maintain current insurance
Part of the qualifications to be an APRA regulated super fund, includes the offer of insurances, and it is highly likely that most of clients seeking advice will have some level of cover in their super. Depending on the size of the fund and existing relationships, there may be times when cover is available at a cheaper rate than retail policies. Depending on the client circumstance and needs, this may be appropriate.
The situation also exists where a client may not be able to obtain cover elsewhere and there is no other effective option.
If, after careful consideration, the option of maintaining a portion of cover through an existing fund is deemed appropriate, there are some areas which need to be addressed prior to the establishment of the SMSF.
- Consider the needs and circumstances in detail;
- Address the specific disadvantages of maintaining more than one super fund;
- Explain the risks of depleting the balance of the fund containing the insurance if it is not managed appropriately;
- Discuss the eligibility requirements of the fund maintaining the insurances, such as the need to receive contributions to the fund;
- Address the potential increase in costs and complexity of two super funds; and
- Ensuring that the binding nomination requirements are maintained throughout the life of the client.
“Push to the left, back to the right
Twist and turn ‘til you’ve got it right
Get the balance right”
— Depeche Mode, Get the Balance Right
Balance. A key word which can create confusion and strike fear into the heart of the adviser.
Some advisers have a view that the best and most comprehensive insurance strategy must be recommended at all times. In a perfect world, this would seem logical. However, it is not when it is at the detriment of all else.
The consideration of insurance should include the client’s overall situation and discuss reasonable and realistic options which do not undermine the other goals and objectives.
A common scenario we see is the establishment of Life and TPD within superannuation when the client has no dependents or debt. Certain policies within the superannuation environment require Life to be purchased along with TPD but when it is avoidable, determination needs to be made whether there is a need. There are some circumstances where this is un-avoidable, but it is imperative that this is addressed and explained prior to making any decisions. Recommending types of cover that are not needed or amounts of cover that are in excess of needs is inappropriate and not in the client’s best interests.
- Determine the specific needs for the insurance;
- Uncover future plans and requirements;
- Assess the ongoing requirements into the future;
- Discuss affordability and desired level of control over the policy;
- Prioritise and balance the needs and objectives with the ability to fund now and into the future;
- Address any detriment to retirement goals which may be caused by the advice; and
- Strike balance.
5. Affordability and ongoing appropriateness
“When recommending insurance, the advice provider needs to consider the investor’s overall financial situation and discuss realistic insurance options with the investor.”
— ASIC Report 337: SMSFs: Improving the quality of advice given to investors
Trustees of a Self-managed Super Fund must consider the needs of its members. In some cases, the most appropriate option is to place the insurance cover within the superannuation environment, whilst others it is not. Either way, determining the affordability and suitability of the approach largely comes down to what options are available and the sustainability of these.
Whether retail or SMSF, the decision to fund premiums from superannuation is a decision which should not be taken lightly. Considering the client needs and wants in balance with the appropriate plan of action takes a certain level of skill and care, and when insurances are placed in super at the first sign of resistance, some may argue that it is the ‘easy way out’. To avoid this takes effective discovery and consideration.
- Discuss the implications of SMSF and personal ownership;
- Sufficiently canvass budgeting and cashflow;
- Consider the balance of the fund and ongoing contributions;
- Consider the ability to make additional contributions;
- Assess the potential upfront and ongoing expenses of the fund;
- Consider the additional members of the fund, estate planning and succession planning;
- Balance the potential insurance advice against the retirement goals; and
- Test possible outcomes with the client.