The existence of life insurance within self-managed superannuation funds (SMSFs) is significantly low but it does equate to a larger underinsurance problem, Self-Managed Super Fund Professionals’ Association of Australia’s (SPAA) national technical director said.
“The only official statistics were part of the Cooper Review with 2008 statistics where only 12.7 per cent of SMSFs had insurance but I don’t think it’s reasonable to jump to the conclusion that we have a bigger underinsurance problem in SMSFs that exists anywhere else,” SPAA national technical director Peter Burgess told InvestorDaily.
“SMSFs are typically more self-sufficient and therefore less reliant on insurance,” Burgess said.
“A recommendation out of the Cooper Review, which the government has accepted, is that trustees should be required to consider insurance as part of their investment strategy so there was some attempt there to address any underinsurance issues that may exist in the SMSFs sector.”
For those SMSFs that wanted to take out insurance, it was expensive and also difficult as they could not access group life insurance, although recent products had been released to market to fill that gap, he said.
SPAA did not agree that compulsory insurance for SMSF trustees was necessary, Burgess said.
“Whilst that 12.7 per cent figure is quite low, you’d expect that to start creeping up, given that funds have limited recourse borrowing arrangements,” he said.
“The fact that funds can now borrow arguably makes insurance more important.”
Self Super Insurance managing director John Kelly said there was a problem of the different types of insurance, which included life insurance, being overlooked in SMSFs.
Kelly said three prevailing attitudes existed: trustees who bought insurance and had an appreciation of what it was trying to achieve, those that didn’t buy appropriate insurance and the largest group were half-way, as they bought insurance but focused on the price and therefore missed out on the appropriate level of cover.
“When I looked at SMSFs, there’s a whole raft of risks that they have within their fund [separate from] compliance and occupational risks,” he said.
“If SMSF trustees had gone to the effort of establishing a fund to take control of their finances, it doesn’t make sense for them not to put in an adequate solution to de-risk the fund.”
Investment properties, fine art and collectibles and trustee liability were the key insurance elements that were overlooked in an SMSF, Kelly said.
“You’ve got risk through investments, which has been a hairy ride in the last couple of years, so why not remove all this other risk?” he said.
“If you’re getting a 5 per cent return on cash but then someone steals your artwork, burns down your house or randomly audited [identifying an operation error], that is wiped out in an instant.”
The value of insurance was not appreciated as most people held the attitude of never expecting a loss or an incident to happen to them, Kelly said.
“They’ve got responsibilities as trustees of a fund and that means they must act in a prudent fashion, which is to take into consideration different insurance solutions,” he said.
