Life Insurance – Who Pays?
Life insurance in SMSFs requires special consideration. Quite apart from the extra tax deduction gained from the future service benefit or the impost of extra tax where proceeds are not paid to tax dependants, there is the issue of who pays the premiums.
Premiums must be debited to the insured’s account but which account? If the member has both a pension and an accumulation account, do we debit one rather than the other or both pro rata? Though it is rare for a member with both a pension and an accumulation account to also have life insurance it does happen – as a recent question from an Alliance Partner concerning just such a member proves.
The SMSF will gain a tax deduction for the insurance premium irrespective of whether the member account that pays the premium is in pension or accumulation mode. The temptation is to draw the premium from the accumulation account to maximise the exempt pension income balance but is this the right thing to do? The ATO expect the life proceeds to be deposited into the account that is paying the premium so, If the intention is to pay the proceeds from the fund, the answer is yes.
If, however, the pension is reversionary this may not be the best decision. Currently, if life insurance proceeds are received by a reversionary pension, they will not affect the recipients transfer balance account so may be retained in the pension. This represents a clear advantage.
But, if no claim arises and the policy is eventually allowed to lapse, the pension account will be lower than it would have been had the premiums been paid from the accumulation account.
So the answer to the question is “It depends”.