Don’t overlook insurance in SMSF for long-term tax savings

SMSF insurance planning is often overlooked but it can significantly enhance fund value for members or beneficiaries as well as create substantial long-term tax savings, an industry leader said.

David Busoli, principal of SMSF Alliance, said at the SMSF Association national conference last month that while there are complications around holding life insurance in a separate APRA-regulated super fund while operating an SMS, there is also a future service benefit deduction.

Busoli said one of the biggest challenges of holding life insurance in a separate APRA-regulated fund is that if a member dies, insurance proceeds paid into a super fund do not automatically go toward repaying debts such as SMSF loans.

Instead, the trustee has discretion over how the benefit is distributed and moving proceeds between funds is possible but complex.

However, he said under certain conditions, holding life insurance within an SMSF, means when a member dies, the fund can claim a substantial tax deduction that may far exceed the insurance premium paid. This deduction can significantly reduce future tax liabilities of the SMSF.

“We have a situation quite often where people roll over from an APRA fund, and leave the life insurance in that fund, and pay a little bit of ongoing contribution there to keep that going,” he said.

“But what happens in death? Well, if the life insurance is in the fund, naturally, it goes into the fund, it doesn’t then go off to pay the debt. You can’t have that sort of arrangement. It’s going to be applied at the discretion of the trustee.

“The trustee might determine to pay or some of the debt, but it’s not an automatic thing. And if it goes to the other fund, well, how do you get it into here?”

He continued that there are certain mechanisms with which to achieve this but it is not a simple task.

“One other thing that people don’t take into account with SMSs in terms of life insurance is that there is a particular benefit which has been a special of mine for years, and that is the future service benefit,” he said.

“With the future service benefit under certain conditions, and it’s not applicable all the time, but if someone dies, there is a tax deduction that can be taken by the fund, which has nothing to do with the particular insurance policy, just the fact that it existed and that there was a premium paid in the year of the benefit.

“Typically, you might have a situation where you can take a choice of tax deduction. You take a choice of $2000 for the premium, or $1 million under the calculation. That $1 million is held in the fund as a tax deduction to the fund which can be used to offset contributions tax and accumulation tax until it’s used up.”

Keeli Cambourne

March 9 2026

smsfadviser.com