Insurance Suffers a Steady Decline in SMSFs: Lifebroker

February 17, 2012 - Since 2004, the Australian Taxation Office (ATO) has tracked asset allocations, along with a variety of demographic variables, in self-managed superannuation funds (SMSFs) and, for insurance brokers, one of the more interesting findings is the decreasing role played in SMSFs by insurance policies.

In June 2004, life insurance policies held in SMSFs were valued at $328 million. Since then, that value has undergone a steady decline that puts the value of insurance held in SMSFs at $197 million as of September 2011.

Even more striking, the total value of all assets held in SMSFs in 2004 was $126 billion. Life insurance policies accounted for 0.2% of that total value. By 2011, the total value of all SMSFs had climbed to $397 billion, but the share represented by insurance policies had fallen to 0.05%, a fourfold decrease.

According to the most recent figures, the value of insurance policies in SMSFs is lower than the value attributed to any other category in the ATO classification system except "overseas non-residential real property."

While the ATO does not delve into reasons for the decline, several factors may be at work. As more fund members come closer to retirement, they are likely to be cancelling policies or reducing coverage, leading to a decrease in the asset's value, or cancelling policies outright. Values may also be reduced in the face of the increasing cost of policies of all kinds.

The complications of including insurance in SMSFs may also play a role. According to Andrea Slattery, CEO of the SMSF Professionals' Association of Australia, speaking to http://www.insurancenews.com.au, "There are taxation issues depending on the type of policy and the structure of ownership that people don't know about." Slattery noted that accountants for SMSFs cannot offer insurance advice if they do not hold a financial services license, but she predicted that upcoming financial reforms might resolve that situation by licensing accountants who offer advice pertaining to financial services.

Some of these reasons may account for one perplexing trend: While SMSF policies have fallen, a recent analysis from DEXX&R reported that premiums for new and in-force policies in the general market had grown significantly.

The ATO derives its statistics from the SMSF income tax and regulatory return for periods before June 2008 and from the SMSF annual return for later periods. As a result, asset categories do not follow the same conventions for the two periods. Earlier returns listed "life insurance policies" as a separate category. Later returns referred simply to "insurance policies."