Monday, October 24, 2011

Insurance funding via superannuation

Earlier posts have mentioned the ‘debt reduction’ and ‘hybrid’ buy sell arrangements and I can forward information in this regard for those interested.

One particular issue raised with me recently in this area was the ability to use superannuation owned policies for insurance arrangements supporting a debt reduction (or asset protection) solution.

Generally the position is that the asset protection (debt reduction) component of any insurance policy should be self owned, rather than superannuation owned.

This is because a superannuation fund trustee is unlikely to be able to make the required payment directly to the other principals, as the fund can only pay a benefit to a member (in the case of disablement), or to the dependants or estate (in the case of death).

Furthermore, a superannuation fund could not be a party to the agreement as this would raise issues about compliance with the sole purpose test, and also might be construed as an assignment of a benefit, which super fund trustees are prohibited from recognising.

Given these technical limitations, there could be no certainty that insurance proceeds held in superannuation would find their way to the correct parties to enable them to pay down the external debt.

This said, it is often possible to have two policies for each principal under a hybrid buy sell deed, one being a self owned policy for asset protection (debt reduction) purposes and the other policy being owned through superannuation for equity transfer (that is, traditional ownership or buy sell) purposes.

Until next week.