In the world of Self-managed Super fund, a cross-insurance policy is one wherein an SMSF trustee takes out a policy over a member’s life with the clause to deduct premium from the account of another member. In being so, the cross-insurance policy benefits the member who has paid for the insurance in case of an insurance event arising.
Cross-insurance
Cross-insurance is an unconventional measure that can come in real handy and can certainly be used f the law of the land permits it. In other words, you have to find out whether the governing SMSF rules allow for such a policy. If not, do not get yourself in a compliance tangle no matter how lucrative or protective the idea sounds.
ATO’s stance
The ATO, on its part, has laid down in 2012 that such policies are within the ambit of legality wherever the governing rules of SMSF state so. The Superannuation law on the other hand is pretty new and underdeveloped as yet but there is not a single idea that questions the legality of the cross-insurance turf.
Idea behind cross-insurance
The central idea behind taking out this kind of policy is to ensure that the SMSF has substantial capital in its kitty to pay benefits in case of the demise of a member without jeopardising the estate or selling away the premise of business in question. This is why there is an urgent need to check into the net equity position and confirm whether there is enough in the kitty to set off the liabilities.
Sole Purpose test
When the cross-insurance policy runs concurrently with a cross-insurance deed, it ends speculations about the policy passing the Sole Purpose test; the first and most eyebrow-raising conjecture about the turf of cross-insurance one supposes.
