SMSF trustees must consider whether to hold insurance for each member (SIS Regulation 4.09). Death, terminal illness and disability premiums are largely deductible (TPD any-occupation 100%, own-occupation 67%), but trauma cover isn't deductible and can't be newly taken out since 1 July 2014. Deductions aren't reduced by exempt pension income, but at retirement TPD-style cover often stops earning its keep.
Trustees of a self-managed super fund (SMSF) have a specific legal duty most never think about directly: they must actively consider whether the fund should hold insurance for each member, as part of the fund's investment strategy. This article sets out that duty, what kinds of insurance an SMSF can actually deduct, and the practical question that matters most for retirees — whether the cover is still doing anything useful once you've stopped working.
The compliance duty: it's not optional to consider
Regulation 4.09(2) of the Superannuation Industry (Supervision) Regulations 1994 requires the trustee of an SMSF to "formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity", including five specific factors: the risk and likely return of the fund's investments having regard to its objectives and cash flow needs; the composition and diversification of its investments; the liquidity of its investments; the fund's ability to discharge its existing and prospective liabilities; and "whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund" (SISR reg 4.09(2)(a)-(e), ATO Legal Database, https://www.ato.gov.au/law/view/document?docid=REG/19940057/4.09).
The ATO's own guidance repeats the point directly: every investment strategy needs to consider the particular circumstances of the SMSF and its members, including "whether to hold [insurance] (such as life, permanent or temporary incapacity insurance) for each SMSF member" (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/setting-up-an-smsf/create-your-smsf-investment-strategy). Trustees don't have to hold insurance for every member — the duty is to consider it and document that they did, not to obtain a policy regardless of circumstances. See our article on the annual investment strategy review duty for how this fits into the broader annual review obligation.
What kinds of insurance can an SMSF actually deduct?
This matters because the tax treatment differs sharply by the type of cover, and the rules changed for anything new since 1 July 2014.
The ATO's SMSF annual return instructions give a worked example: a fund that pays $3,000 for death cover, $2,500 for terminal medical condition cover, $2,500 for temporary or permanent disability cover, and $2,000 for cover of specified traumas (such as strokes), can deduct the first three ($8,000 in total) but not the trauma cover ($2,000) (ATO, https://www.ato.gov.au/forms-and-instructions/self-managed-superannuation-fund-annual-return-2022-instructions/instructions-to-complete-your-annual-return/section-c-deductions-and-non-deductible-expenses-item-12). The ATO states plainly that non-deductible insurance premiums include "payments for insurance that covers events other than death, the existence of a terminal medical condition, or temporary or permanent disability (for example, funeral insurance)".
For total and permanent disability (TPD) cover specifically, the deductible proportion depends on the policy's definition of disability: a fund can deduct 100% of premiums for "TPD any occupation" cover, but only 67% of premiums for "TPD own occupation" cover (ATO, Table 6). A whole of life policy is only 30% deductible, and an endowment policy only 10% deductible, and only where all the lives insured are fund members.
Trauma cover is a dead end for new business. The ATO's own example notes that trustees are "prohibited from obtaining a policy covering trauma insurance that started after 30 June 2014", and existing trauma cover only continues to apply to members who joined the fund before that date. If your fund still holds trauma insurance from before that cut-off, it keeps working for the members it already covers, but it is not deductible and cannot be extended or newly purchased.
The point most people miss: pension-phase income doesn't reduce the deduction
Once a member starts drawing a pension from the fund, some of the fund's income becomes exempt current pension income (ECPI), and most ordinary running expenses — the audit fee, investment manager fees, capital works — have to be apportioned, with only the part relating to the fund's taxable income staying deductible. Insurance premiums for death, terminal illness and temporary or permanent disability cover are the exception. The ATO's guidance says explicitly: "the amount of insurance premiums that the SMSF can deduct is not affected by any exempt current pension income" (ATO, same source as above). So a fund with members in pension phase doesn't lose part of its insurance deduction the way it would for other expenses.
What actually changes when you retire
The compliance and tax rules above don't change the moment you retire — what should change is whether the cover is still doing anything for you.
- TPD and income-protection-style cover exist to replace income lost through an inability to work. Once you have genuinely stopped working and are drawing a pension, that risk has largely gone, and continuing to pay premiums for it inside the fund is money drawn down from your retirement balance for a benefit you're unlikely to claim. This is our own observation, not a rule the ATO states, but it follows directly from what the cover is designed to do.
- Death cover is a different question. It can still matter for what your beneficiaries receive when you die, on top of your account balance, and how that benefit interacts with your death benefit nomination; see our articles on reversionary pensions versus binding death benefit nominations and, outside super, on keeping or cancelling existing life insurance in retirement.
- The sole purpose test still applies. Insurance held for a member has to fit within the fund's purpose of providing retirement or death benefits; see our article on the sole purpose test if you're unsure whether a particular arrangement fits.
- Pre-retirement income protection is a separate question again, usually held outside super for pre-retirees still working; see our article on salary continuance insurance in late career.
Worked example
Illustrative only, not personal advice.
Colin, 68, retired two years ago and draws an account-based pension from his SMSF. The fund still holds a TPD-any-occupation policy on his life from when he was working, plus a small death cover policy. The TPD cover is doing very little for him now — a permanent incapacity for work is not something that affects a retiree's income the way it would someone still working, so the ongoing premium is arguably an unnecessary drain on his pension balance. The death benefit cover is a different matter: if Colin dies, that payout adds to what his SMSF pays his nominated beneficiaries, on top of his account balance, so whether to keep it turns on his estate planning and his beneficiaries' needs, not on his own working capacity. Colin's trustee (himself, as sole trustee of his own fund) should review both at the fund's next investment strategy review, and document the reasoning either way.
Sources
- ATO Legal Database — SISR regulation 4.09
- ATO — Create your SMSF investment strategy
- ATO — SMSF annual return instructions, Section C: Deductions (item 12)
Key takeaways
- SIS Regulation 4.09(2)(e) requires SMSF trustees to consider whether to hold insurance for each member as part of the fund's investment strategy — the duty is to consider it and document that, not to obtain cover regardless of circumstances.
- Death, terminal medical condition and temporary or permanent disability premiums are largely deductible; TPD any-occupation cover is 100% deductible and TPD own-occupation cover only 67%, while whole of life (30%) and endowment (10%) policies are only partly deductible.
- Trauma insurance premiums are not deductible, and SMSF trustees are prohibited from obtaining a policy covering trauma insurance that started after 30 June 2014; existing trauma cover from before then continues only for members who joined before that date.
- The ATO states that the amount of insurance premiums an SMSF can deduct is not affected by exempt current pension income, unlike most other fund expenses (audit fees, investment expenses, capital works), which are apportioned once a member is in pension phase.
- At retirement, TPD and income-protection-style cover generally stop serving their purpose once you've stopped working, while death cover remains relevant to what your beneficiaries eventually receive — the trustee should review both at the next investment strategy review.
Frequently asked questions
Does an SMSF have to hold insurance for its members?
No. SIS Regulation 4.09(2)(e) requires the trustee to consider whether the fund should hold insurance for one or more members as part of formulating and reviewing the investment strategy. The duty is to actively consider it and document that consideration, not to obtain a policy regardless of the members' circumstances.
What insurance premiums can an SMSF deduct?
Premiums for death cover, terminal medical condition cover, and temporary or permanent disability cover are generally deductible. TPD any-occupation cover is 100% deductible; TPD own-occupation cover is only 67% deductible. Whole of life and endowment policies are only 30% and 10% deductible respectively, and only where all the insured lives are fund members.
Can an SMSF claim a deduction for trauma insurance?
No. The ATO states that insurance covering events other than death, terminal medical condition, or temporary or permanent disability — for example trauma or funeral insurance — is not deductible. SMSF trustees are also prohibited from obtaining a policy covering trauma insurance that started after 30 June 2014; existing pre-July-2014 trauma cover continues only for members who joined before that date.
Does having members in pension phase reduce an SMSF's insurance deduction?
No. The ATO says the amount of insurance premiums an SMSF can deduct is not affected by exempt current pension income, unlike most other running expenses such as audit fees, investment expenses and capital works, which have to be apportioned once the fund has members in pension phase.
Should I keep TPD or income protection cover in my SMSF once I've retired?
That cover is designed to replace income lost through an inability to work, so once you've genuinely stopped working it generally has little left to do, and the premiums are drawn from your retirement balance. Death cover is a separate question, since it affects what your beneficiaries receive; review both at your fund's next investment strategy review.