Advisers need to be aware that self-managed super fund members transferring their life insurance policies will breach the “arms-length” transaction rules, a lawyer has warned.

Brett Davies of Law Central told insuranceNEWS.com.au a policy will need to be rewritten within the SMSF structure rather than just be transferred to the fund.

“Life insurers have no problem rewriting the policy, but if it is just transferred it becomes a related party transaction,” he said.

“If it is a related party transaction, the only solution is to go out to the market to seek a new policy.”

This could be problematic for older SMSF members, because medical checks would be applied and could result in reduced cover or a refusal to issue a new policy.

Mr Davies says there have been occasions where insurers have “turned a blind eye” to keep the policy.

“This is not legally right and they shouldn’t be doing it,” he said.

Since July 1 this year, the Australian Taxation Office has required SMSFs to document any insurance policies as part of their investment strategy paperwork.

The strategy is required to be reviewed regularly and acted upon if material changes affect the outcomes in the document.

Mr Davies says evidence of the trustees considering insurance, both life and general, should either be included in the fund’s investment strategy or minutes.

“It is important to make sure the trustees of the fund have considered taking out insurance and this is documented,” he said. “This should be included when implementing the investment strategy and each time the document is reviewed.”

The penalty for an adviser not considering insurance in the fund could be as high as $110,000, Mr Davies says.

A more detailed examination of insurance in SMSFs will appear in Wednesday’s Life+Health insuranceNEWS.com.au