SMSF Insurance Requirements: What the ATO Expects Trustees to Do
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The ATO does not require SMSF trustees to hold insurance — but it does require every trustee to formally consider whether each member needs cover and document that decision in the fund's written investment strategy.
This obligation has been in force since 7 August 2012, when SIS Regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994 was amended under the Strong Super reforms. Failure to document the consideration — even when the decision is not to hold cover — is a compliance breach that the fund's annual auditor is required to check for and report to the ATO.
According to Christopher Hall, AdvDipFP, Authorised Representative AFSL 526688, who has conducted more than 500 insurance reviews for SMSF clients, the majority of new trustees arriving at his practice had no idea this obligation existed — and most assumed their previous default super fund cover had transferred across when they rolled over. It had not.
Research cited by the Cooper Review into superannuation — the government review that prompted the 2012 rule change — found that only 13% of SMSFs held any form of life insurance at the time. That figure reflects a systemic gap the regulation was designed to address, and it remains a concern today.
This article covers two distinct insurance questions that arise when a property is held inside an SMSF: the building and landlord insurance on the property itself (a trustee administrative matter), and the member insurance obligation under SIS Regulation 4.09 (life, TPD and income protection), which is the obligation most trustees are unaware of.
Written by Christopher Hall, AdvDipFP | Authorised Representative, AFSL 526688
Published: March 2026 | Last updated: March 2026
What Does the ATO Actually Require SMSF Trustees to Do About Insurance?
The ATO requires every SMSF's written investment strategy to address whether to hold insurance cover for each member — this is a formal legal requirement, not optional guidance.
According to the Australian Taxation Office (ato.gov.au), an SMSF's investment strategy must consider all members' personal circumstances, include investment objectives and the types of investments allowed, consider liquidity and diversification of assets, and address whether to hold insurance. The ATO publishes this explicitly on its guidance page for trustee obligations.
The ATO states your SMSF investment strategy must:
Consider all members' personal circumstances
Include investment objectives and types of investments allowed
Consider liquidity and diversification of assets
Consider whether to hold insurance cover for each member
Be regularly reviewed and updated when needed
Source: Australian Taxation Office — "Your obligations as an SMSF trustee", ato.gov.au
The critical distinction is consider and document versus mandated to hold. A trustee who formally reviews the question, decides insurance is not currently appropriate, and records that reasoning in the investment strategy has met their legal obligation. A trustee who ignores the question entirely has not — regardless of what cover the members hold elsewhere.
Written evidence of this review must be provided to the fund's SMSF auditor at each annual audit. Records of all investment strategy reviews — including the insurance consideration — must be kept for a minimum of 10 years, as required by the ATO.
What Is SIS Regulation 4.09 and Why Was It Introduced?
SIS Regulation 4.09 is the provision of the Superannuation Industry (Supervision) Regulations 1994 that requires SMSF trustees to formally consider insurance for each member as part of the fund's written investment strategy — a requirement that has been in force since 7 August 2012.
The amendment was introduced under the Strong Super reforms — a package of legislative changes that followed the Cooper Review, a government-commissioned review into superannuation. The Cooper Review observed that many Australians moving from industry or retail super funds into SMSFs were inadvertently leaving behind group insurance that their old fund had provided automatically.
Under SIS Regulation 4.09, trustees must formulate, review regularly and give effect to an investment strategy that has regard to the whole circumstances of the fund. Insurance is one of five criteria that strategy must address. The trustee does not need to hold cover — they need to demonstrate, on the record, that they turned their mind to the question.
The ATO made clear in 2019 that it takes this obligation seriously: approximately 18,000 SMSF trustees received letters from the ATO that year flagging concerns about investment strategy compliance, including the insurance consideration. SMSF auditors were simultaneously notified of their obligation to actively check for compliance.
As recently as July 2025, SMSF administration specialists observed that the ATO's approach has shifted from education to active enforcement on investment strategy obligations, with advisers reporting an increase in auditor management letters and audit scrutiny as a result. (Source: SMSF Engine, smsfengine.com.au, July 2025.)
The penalties for non-compliance are as follows, according to the SIS Act:
Administrative penalty for failure to maintain a compliant investment strategy: up to $4,200 per individual trustee (20 penalty units, SIS Act s.166)
Penalty for intentional or reckless non-compliance: up to $21,000 per trustee (100 penalty units, SIS Act s.34(2))
Directors of a corporate trustee are jointly and severally liable for any penalty imposed on the corporate trustee
Note: Penalty unit amounts are set by the Commonwealth and indexed periodically. Trustees should confirm the current rate at ag.gov.au before relying on the above figures.
Is SMSF Property Insurance the Same as the ATO Insurance Obligation?
Building and contents insurance on a property held inside an SMSF is entirely separate from the member insurance obligation under SIS Regulation 4.09 — and confusing the two is one of the most common misunderstandings among new SMSF trustees.
According to Christopher Hall, AdvDipFP, Authorised Representative AFSL 526688, Principal of Arrow Equities and an adviser with more than 500 SMSF insurance reviews to his name:
"It's completely understandable that new trustees get confused between building insurance on the property and the requirement to address their own life and TPD cover. When a trustee has just been through a significant checklist of steps to establish their SMSF, these things can blend together. They are actually two separate obligations — and the member insurance side is the one that most people don't know exists."— Christopher Hall, AdvDipFP, AFSL 526688 | Arrow Equities
Building / Landlord Insurance on SMSF Property | Member Insurance Under SIS Regulation 4.09 |
Covers the physical asset (building, contents, rental income) | Covers what happens to members — death, disability, inability to work |
A trustee administrative matter — arranged directly | Requires formal consideration and documentation in the investment strategy |
Not subject to SIS Regulation 4.09 | Directly governed by SIS Regulation 4.09 (since 2012) |
Most trustees know about this and arrange it routinely | Most new trustees are unaware this obligation exists |
Types: building, contents, landlord, LRBA mortgage insurance | Types: life (death), TPD, income protection |
There is a separate hard rule for collectables held inside an SMSF — artwork, wine, jewellery and similar assets must be insured within seven days of the fund acquiring them, and the fund must be listed as the owner and beneficiary of the policy. According to the ATO's guidance on investment restrictions (ato.gov.au), failure to insure collectables in this way is a breach of superannuation law, not merely a compliance gap.
What Happens if an SMSF Trustee Doesn't Document the Insurance Consideration?
Failure to document the insurance consideration in the SMSF's written investment strategy is a compliance breach — one the fund's annual auditor is specifically required to check for and report to the ATO.
Every SMSF must be audited annually by an ASIC-registered auditor. One of the auditor's statutory obligations is to check whether the investment strategy addresses all five criteria of SIS Regulation 4.09, including the insurance consideration. If it does not, the auditor may be required to lodge an Auditor Contravention Report (ACR) with the ATO.
An ACR triggers further ATO scrutiny of the fund and can result in the penalty amounts described in the previous section. The compliance obligation runs in both directions — trustees must document, and auditors must check.
This point is illustrated by the 2018 case of Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502, in which an SMSF auditor was held liable for damages after failing to identify a non-compliant investment strategy. While the case concerned auditor liability rather than trustee penalties directly, it demonstrates that the courts treat SIS Regulation 4.09 compliance as a substantive obligation — not a technicality.
More broadly, the management of an SMSF involves a network of professional obligations that extends beyond the trustee alone. The trustee carries the primary statutory responsibility for compliance. The SMSF auditor is required by law to review the investment strategy and report contraventions. Accountants and SMSF administrators who provide ongoing services to the fund have professional obligations to flag compliance gaps within the scope of their engagement. Where a licensed financial adviser is involved in the fund's insurance or investment strategy, their advice must meet the standards required under the Corporations Act 2001 (Cth). Each party in this network has distinct obligations — but the trustee remains accountable for the fund's overall compliance position regardless of who assists them. For a broader overview of the regulatory framework governing life insurance in Australia, including the role of ASIC, AFCA and the Life Insurance Code of Practice, that article covers these protections in detail.
As noted above, SMSF administration specialists observed in July 2025 that the ATO's approach has shifted from education to enforcement. Trustees who have relied on generic investment strategy templates — particularly those that do not specifically address the insurance consideration for each individual member — are at increasing risk of an auditor management letter or an ACR.
What Happens to Your Old Super Fund Insurance When You Roll Over to an SMSF?
In the experience of Christopher Hall, AdvDipFP, AFSL 526688, who has reviewed insurance arrangements for more than 500 SMSF clients, the most common finding is straightforward: the existing super fund insurance was cancelled at the moment of rollover, often without the trustee fully realising it had happened.
Group insurance held through an industry or retail super fund is attached to membership of that fund. When a member rolls their balance out of the fund and into an SMSF, their membership ends — and with it, their cover. The cover does not follow the money. The common coverage gaps left behind by this transition — across life, TPD and income protection — are among the most consistent findings across SMSF insurance reviews.
"The most common situation seen across SMSF insurance reviews is that the existing super fund insurance was cancelled the moment the rollover was completed. Even when some cover did carry across, it was often set years ago — a group insurance amount often in the range of $30,000 to $50,000 for TPD, when the actual need, once the debt profile and family situation is properly assessed, often far exceeds $1 million. These figures illustrate the gap between the default cover most SMSF trustees inherit and what their financial and family circumstances actually require. The appropriate level of cover for any individual is determined through a detailed assessment and set out in a Statement of Advice."— Christopher Hall, AdvDipFP, AFSL 526688 | Arrow Equities — based on 500+ SMSF insurance reviews
The gap between what group insurance provides and what an SMSF trustee actually needs is one of the most consistent findings across Christopher Hall's review practice. Group insurance cover amounts are typically set at a nominal default — they are not calculated against the individual member's debts, income, dependants or the fund's liability profile. For SMSF trustees who often hold significant property assets with associated debt structures, this mismatch can be material.
The Risk That Cannot Be Undone — Pre-Existing Medical Conditions and Lapsed Cover
For SMSF clients who allow cover to lapse during the establishment process and who have significant pre-existing medical conditions, there is a risk that is genuinely irreversible: they may find they cannot obtain new insurance on equivalent terms — or at all.
Life insurance applications are subject to underwriting — a process in which the insurer assesses the applicant's health history and determines whether to offer cover, and on what terms. A client who was accepted for cover through their former super fund's group scheme years earlier, when group insurance often had more relaxed underwriting standards, may not receive the same outcome when applying individually with a more complex medical history. Navigating the underwriting process without specialist support is one of the most common points at which new SMSF insurance applications encounter difficulty.
"The most difficult conversations are with clients who arrive with a complicated medical history and a gap in cover that happened during the SMSF rollover. They discover they can no longer get new insurance on the terms their old policy provided. That is an outcome that cannot be fixed after the fact."— Christopher Hall, AdvDipFP, AFSL 526688 | Arrow Equities
This is one of the strongest arguments for addressing the insurance review at the point of SMSF establishment — not as a final administrative step after everything else is in place, but as an integral part of the process, before any existing cover is allowed to lapse.
What Christopher Hall Finds in SMSF Insurance Reviews
Based on 500+ SMSF insurance reviews — Christopher Hall, AdvDipFP, AFSL 526688, Arrow Equities
Finding | Detail |
Most common rollover outcome | Existing super fund insurance cancelled at point of rollover — cover does not transfer to the SMSF |
Typical group TPD cover inherited | Often in the range of $30,000–$50,000 |
Typical need identified after assessment | Often far exceeds $1 million once the debt profile and family situation is properly assessed |
Cover type most consistently sought — property-holding SMSFs | Life (death cover) + TPD, both held inside the SMSF |
Most serious risk identified | Clients with a significant pre-existing medical history who allow cover to lapse during SMSF establishment may become uninsurable for the cover they previously held |
These observations are drawn from Christopher Hall's advisory practice and represent typical patterns across SMSF insurance reviews, not statistical research. The appropriate level of cover for any individual depends entirely on their personal circumstances and must be assessed with a licensed adviser.
What Types of Insurance Can an SMSF Hold?
According to the ATO, SMSF trustees can provide insurance for a member for any event that is consistent with a condition of release — this includes life (death) cover, total and permanent disability (TPD) insurance, and income protection.
The ATO's guidance on creating an SMSF investment strategy (ato.gov.au) sets out which types of insurance are consistent with the sole purpose test. These are:
Life (death) insurance — including terminal illness benefits
Total and permanent disability (TPD) insurance — covering permanent inability to work
Income protection insurance — covering temporary inability to engage in gainful employment
The ATO states explicitly that SMSFs generally cannot provide trauma insurance for their members, as this does not meet the sole purpose test. Trauma insurance pays on diagnosis of a specified illness regardless of whether the member can work — this does not align with the conditions of release that govern superannuation benefits.
One important structural consideration for SMSF trustees is the TPD definition. TPD policies can be written on an own occupation or any occupation basis, and the definition has a direct bearing on when and whether a claim will be paid. Trustees with older grandfathered own occupation TPD policies held inside an SMSF should seek specialist advice — there is a specific risk that claim proceeds may become trapped inside the fund if the SIS conditions of release are not also met.
On tax treatment, the ATO confirms that trustees of complying super funds can claim a deduction for insurance premiums for life, TPD and income protection cover held inside the SMSF. This is one of the key structural advantages of holding cover inside the fund rather than personally — the premiums are paid from pre-tax superannuation contributions rather than from after-tax income.
Insurers who offer policies structured for SMSF ownership include TAL, AIA, Zurich, MetLife, Acenda, NEOS and Encompass. These are named as context only — the appropriate insurer, product and structure for a specific SMSF depends on the individual member's circumstances, health history and the fund's requirements.
"In the experience of Arrow Equities, SMSF clients with a mortgage or debt structure in their fund most consistently seek life and TPD cover as a starting point. For younger trustees, income protection is often also considered. All of these can be structured so the SMSF pays the premiums, which provides meaningful tax advantages that trustees would not access if the policies were held in their own name. A detailed analysis of what is appropriate for each client's specific circumstances is provided in their Statement of Advice."— Christopher Hall, AdvDipFP, AFSL 526688 | Arrow Equities — based on 500+ SMSF insurance reviews
How Does an SMSF Trustee Actually Satisfy the ATO Requirement?
An SMSF trustee satisfies the SIS Regulation 4.09 insurance obligation by reviewing each member's circumstances, documenting the decision about whether to hold cover and why, and providing evidence of that review to the fund's auditor at the annual audit.
In practical terms, the process involves six steps:
Review the fund's written investment strategy and confirm whether the insurance consideration has been addressed for every member individually.
Assess each member's circumstances — age, family situation, existing cover held outside the fund, and the fund's debt and liability profile, including any LRBA or mortgage attached to property holdings.
Document the decision: to hold cover or not to hold cover — with the specific reasoning recorded. If members already hold adequate cover personally or through another fund, document that. If the fund's structure means insurance inside the SMSF is not appropriate, document why.
If insurance is appropriate, engage a licensed insurance adviser to recommend the right policy, insurer and structure. For those unfamiliar with what a professional insurance review involves — including what information is needed, how insurers are compared and what a Statement of Advice covers — that article sets out the process in full. The ATO also provides free guidance materials for SMSF trustees on investment strategy documentation at ato.gov.au.
Provide evidence of the review to the SMSF auditor at the annual audit, along with the updated investment strategy.
Repeat annually and whenever a member's circumstances change significantly — change of employment, new debt, change in health status, or addition of a new member to the fund.
Do SMSF Trustees Need an Adviser, or Can They Document It Themselves?
A trustee can document the consideration themselves — but engaging a specialist insurance adviser operates similarly to using a mortgage broker: the adviser accesses the market on the client's behalf, across insurers the client cannot access directly, and returns with the most suitable product at the best available structure.
The documentation obligation — the part the ATO requires — is the trustee's own responsibility and cannot be delegated. But the question of what insurance is actually appropriate for the specific members of a specific SMSF requires an assessment of individual needs, health circumstances, debt profile and available products. That assessment is what a licensed insurance adviser provides.
"Several of the insurers accessed through Arrow Equities have no direct public distribution — those policies cannot be obtained without going through a licensed adviser. For those insurers that do offer both direct and advised channels, the pricing is consistent, but the outcome for trustees who try to navigate underwriting without specialist support tends to be notably worse. That's where the value of specialist advice is most tangible."— Christopher Hall, AdvDipFP, AFSL 526688 | Arrow Equities
Referrals to Arrow Equities come most commonly from accountants, SMSF administrators and establishment firms who treat the insurance review as the final step in a completed SMSF setup — the step that closes the compliance loop and ensures the trustee has genuinely addressed the SIS Regulation 4.09 obligation with the benefit of specialist advice.
Frequently Asked Questions
Q1. What insurance does the ATO require an SMSF to have?
The ATO does not require SMSF trustees to hold insurance. Under SIS Regulation 4.09, trustees are required to formally consider whether each member needs insurance and document that consideration in the fund's written investment strategy — but the decision whether to hold cover is the trustee's own.
Q2. What is SIS Regulation 4.09?
SIS Regulation 4.09 is the provision of the Superannuation Industry (Supervision) Regulations 1994 that sets the operating standards for SMSF investment strategies. Since 7 August 2012, it has required trustees to consider and document whether to hold a contract of insurance for one or more members of the fund as part of that strategy.
Q3. Does an SMSF need to hold life insurance?
No. An SMSF is not legally required to hold life insurance. Trustees are required to consider the question and document their decision — whether that decision is to hold cover or not. The compliance obligation is to demonstrate that the question was formally considered, not to hold a specific product.
Q4. What happens if an SMSF doesn't document the insurance consideration?
The fund's annual auditor is required to check whether the investment strategy addresses the insurance consideration. If it does not, the auditor may lodge an Auditor Contravention Report with the ATO, which can result in penalties for each individual trustee under the SIS Act's administrative penalty regime.
Q5. What is the difference between SMSF property insurance and member insurance?
Building, contents and landlord insurance on a property held inside an SMSF is a trustee administrative matter and is separate from the member insurance obligation. Member insurance — life, TPD and income protection — concerns what happens to members if they die or become disabled. Only member insurance falls under SIS Regulation 4.09. Collectables held in an SMSF must be insured within seven days of acquisition under a separate ATO rule.
Q6. How does an SMSF trustee satisfy the ATO insurance consideration requirement?
By reviewing each member's circumstances, documenting the decision about whether to hold cover and the reasoning behind it, engaging a licensed insurance adviser if cover is appropriate, and providing evidence of the review to the fund's SMSF auditor at the annual audit. The process must be repeated annually and whenever member circumstances change.
Q7. What happens to super fund life insurance when a member rolls over to an SMSF?
In most cases, existing super fund insurance is cancelled at the point of rollover. Group insurance held in an industry or retail super fund does not transfer to an SMSF. Trustees should confirm the status of their cover before completing a rollover — particularly if they have a pre-existing medical history that could affect their ability to obtain new insurance.
Q8. Can a trustee be permanently left without insurance cover if the review is delayed after SMSF setup?
Yes, in some circumstances. Trustees who allow cover to lapse during SMSF establishment and who have a significant pre-existing medical history may find that new insurance applications are declined or issued with material exclusions and loadings. In some cases, the cover previously held through a super fund cannot be replaced on equivalent terms. This is one of the most serious risks of delaying the insurance review after SMSF establishment.
Review Your SMSF Insurance Position
Christopher Hall has reviewed the insurance arrangements of more than 500 SMSF clients. If you are unsure whether your fund has met its SIS Regulation 4.09 obligation — or whether your current cover reflects your actual needs — book a no-obligation review.
Educational Disclaimer
This content is for educational purposes only and does not constitute financial advice. Past performance is no guarantee of future results.
The information, opinions and other materials appearing on the Web Site are of a general nature only and shall not be construed as advice. Arrow Equities, AFSL 526688, ABN 87 645 284 680. This general information is educational only and not financial advice, recommendation, forecast or solicitation. Rose Bay Equities accepts no responsibility for the accuracy or completeness of the information, opinions or other materials provided on or accessible through the Web Site. The Web Site has not been prepared with reference to your individual financial or personal circumstances. You should not rely on any advice in this Web Site without first seeking appropriate professional, financial and legal advice. Further, where Rose Bay Equities makes third party material available or accessible through the Web Site you acknowledge that Rose Bay Equities is a distributor and not a publisher of that content and that its editorial control is limited to the selection of those materials to make available. We accept no liability for any loss or damages arising from use.
Bibliography
Regulatory & Legislative Sources
Australian Taxation Office — "Your obligations as an SMSF trustee" — ato.gov.au
Australian Taxation Office — "Create your SMSF investment strategy" — ato.gov.au
Australian Taxation Office — "SMSF deductible expenses" — ato.gov.au
Australian Taxation Office — "What are the SMSF investment restrictions?" — ato.gov.au
SIS Regulation 4.09, Superannuation Industry (Supervision) Regulations 1994 (Cth), as amended by Superannuation Industry (Supervision) Amendment Regulation 2012 (No. 2) — legislation.gov.au
Industry & Research Sources
Cooper Review into Superannuation — 13% SMSF insurance statistic — cited via Experien Insurance Services, experien.com.au
Experien Insurance Services — "Life Insurance Inside an SMSF: What Trustees Need to Know" — experien.com.au
DBA Lawyers — "Investment strategies — what SMSF trustees must do" — dbalawyers.com.au
SMSF Engine — "SMSF Investment Strategy Compliance Risks for Advisers", July 2025 — smsfengine.com.au
Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502 — cited as legal context only
Proprietary Source
Christopher Hall, AdvDipFP, AFSL 526688 — findings from 500+ SMSF insurance reviews, Arrow Equities (arrowequities.com.au). These are adviser observations, not statistical research. Individual circumstances vary.
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