I trained in General Insurance in the UK after my Graduation and much of that time was in the complaints, claims and product design departments. So I know how things go wrong when people take out unsuitable policies or under-insure their properties. 24 years later and nothing has changed, so I have been recommending people use a General Insurance Broker if they are inexperienced, lack confidence or want help and advice about insuring their business, liability or property assets.
That brings me to the title of this blog and I asked my preferred Insurance Broker here in the Hills District of Sydney, who operates countrywide, to explain the insurance requirements for an SMSF buying property
Don’t skimp on your insurances because when the time comes and you have a claim, you won’t be congratulating yourself on how much money you saved on your insurance premiums.
If you have purchased property in your SMSF it is important for you to take the correct steps to insure your investment.
If you borrow against the assets in your SMSF the mortgagor will require you to have adequate cover for the asset and for the Liability obligations of the SMSF. If the assets of the fund cover the purchase in full however you are still required as Trustee of the fund to correctly insure the funds interests. The fund is not permitted to “self-insure” any assets or property. The ATO has strict guidelines regarding the duties and obligations of SMSF trustees so it is important to get your insurance program right.
The question arises: who takes out the property insurance and landlord’s protection insurance, the SMSF Trustee or the Holding Trustee? I refer to this content from Towsends Law on the matter
SMSF Trustee
The SMSF Trustee is entitled to take out insurances for the property as the Fund is liable under the loan and is also absolutely entitled to the benefit of the Property.
As the Fund is ultimately the party that is detrimentally affected should anything happen to the Property, the SMSF Trustee should ensure that the Fund is able to claim for any damage that might occur.
Holding Trustee
The Holding Trustee is the legal owner of the land and is entitled to insure the property against damage, and likewise for landlord insurance. Some lenders may also insist that the registered proprietor of the property holds an insurance policy for the property.
But it is important to keep in mind the nature of the arrangement between the SMSF Trustee and Holding Trustee should insurance be taken out by the Holding Trustee.
As the Holding Trustee is a bare trustee it must make sure that it does not take any action unless it is directed to do so by the Fund Trustee, who is absolutely entitled to the Property. This direction by the Fund Trustee should be done formally and in writing and confirmed by the Holding Trustee executing minutes to confirm this action.
Final Decision
The final answer is that both the Holding Trustee and the SMSF Trustee have an insurable interest in the land and that both are eligible to be the owner of the property insurance and landlord’s protection insurance over the property.
In both instances all amounts payable in respect of the insurance should be paid by the Fund Trustee. Obviously the Holding Trustee must hold any policy proceeds on trust for the SMSF.
From a purely administrative position it would be easier for the SMSF to hold the insurances to avoid the constant but mandatory interplay between the SMSF and its bare trustee the Holding Trustee. But the insurance company may have its own requirements as might the Fund’s Lender.
So our preference is to have all insurances for the SMSF in the name of the fund. You cannot have personal items or assets listed on a policy in your funds name, and likewise you cannot have your fund’s assets listed on a personal policy for some of your personal assets.
As with all insurances, you really do get what you pay for. The more optional extras you include in your policy the more protection you will have. Let’s go through a fairly standard Landlords Insurance policy and give some simple definitions of each section. Like your personal household insurance policy your landlord’s policy will have cover for both your Building and for your Contents. These are fairly standard; however it is important to read the definitions to determine which items come under which section of cover. You may be in for a surprise if you haven’t studied the wording properly.
Where a Landlords Insurance policy differs in comparison to your standard household insurance is in the additional covers offered.
- Loss of Rent – This is to cover your lost income if you have a claim under your building and contents cover, and the property becomes uninhabitable as a result.
- Strata Title Mortgagee’s Protection – This covers the mortgagee named in the Schedule as if they were “You” on the same terms as Section1 against physical loss or physical damage caused by any of the Defined Events (it does not include the Additional Benefits).
- Deliberate Damage and/or Theft by Tenants – Cover for physical damage arising from deliberate, intentional or malicious acts and acts of theft to the Building or Contents by the Tenant.
- Tenant Default – This cover if for loss of rent, payable by the Tenant, which arises from damage covered under the Deliberate Damage/Theft by Tenant section above or from breach of a written Lease agreement.
Chances are you’ve worked hard at acquiring your assets and building your Super for your retirement. Don’t skimp on your insurances because when the time comes and you have a claim, you won’t be congratulating yourself on how much money you saved on your insurance premiums. Instead you will be hoping your insurance policy will respond to your claim.
If you’re at all unsure on what you need, talk to an Insurance Broker. If you don’t know an insurance broker, then speak to the people you trust with your Investments and your accounts because they should be able to put you in touch with an Insurance broker they trust.
For more information please don’t hesitate to contact me.
The SMSF Coach or Verante Financial Planning do not request or receive any commissions or referral fees from recommending services from Insurance brokers, we just want the best professional advice for our clients.
For more detail on Investing in Property through an SMSF check out our previous articles
Property through super in a SMSF – Part 1: Background
Property through super in a SMSF – Part 2: The Process
Property through super in a SMSF – Part 3: 20 most common mistakes
SMSF Borrowing: What Can I Do With An Investment Property Within The Rules.
Can I borrow to buy a house and land package off the plan in my SMSF?
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Bye for now.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
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