Research shows that many American families can’t survive financially much beyond two credit cycles without some injection of money, and my guestimate is that Australian families are probably in a similar situation.

This means that if a member of an SMSF dies, it’s prudent to make sure any death benefit is paid out to a deceased member’s dependants as quickly as possible because in many cases they’ll need the cash to survive.

There are numerous processes trustees need to follow when a super fund member dies, and these processes differ depending on the type of insurance your SMSF has.

If your fund has life insurance, then there will be some additional processes that need to be followed. These can be complicated if the insurance is held within an administration platform or wrap account.

Insurance proceeds purchased through an administration platform

When insurance proceeds are purchased through an administration platform, trustees deal with the administration platform which will then deal with the life insurer. In other words, you won’t be dealing with the insurer directly.

You may find that dealing with a third party sometimes leads to communication breakdowns that could slow down the time taken to process a claim. For example, you might find the administration platform staff don’t know why the insurer is making certain document requests or you may not be told why there are delays in assessing a claim. To reduce the chance of delays, make sure you have any relevant documentation ready to send through immediately upon request.

When a claim is paid, both the life insurer and the administrator will want a release form signed by the trustees.

Insurance proceeds purchased directly from a life insurer

If you’ve purchased life insurance directly from the insurer, the life insurer will request to see the death certificate upon notice of a member’s death. Depending on the cause of death, a life insurer may want further evidence, such as medical records.

Typically, the life insurer will look to see if all relevant information was disclosed to them when the policy was taken out. This will include medical information and possibly even dangerous employment activities or recreational pursuits.

Also, the higher the level of insurance, the longer it will take the insurer to make an assessment.

It’s important to remember that you take out insurance to make a claim. This means that you need to do all you can to ensure that a life company can make a quick decision to pay out a death insurance claim, so make sure to keep any relevant records accessible to all trustees of your SMSF.

Paying the proceeds out of the super fund

There are no hard and fast rules for SMSF trustees when paying out a death benefit. However, given super funds are trusts, the trustee must act in the best interests of the trust’s beneficiaries and treat all of these beneficiaries the same.

The first job for a trustee is to determine if any binding nomination completed by the deceased member is valid, both in terms of the trust deed and the superannuation law.

If the nomination is valid, then the trustee should follow procedures to pay the benefit in accordance with that nomination.

If the nomination is not valid (or the nomination is not binding on the trustee), then the trustee should go through the following process to determine how the benefit should be paid.

No nomination or invalid binding nomination process

The first task is to identify all possible dependants of the deceased.

Once that’s done, trustees should ask all potential beneficiaries why they should receive some or all of the deceased’s super benefit. After examining all these submissions, a trustee should make an ‘interim’ death benefit distribution decision.

All potential beneficiaries are notified of this interim decision and given the chance to make a second submission, which would either accept with amendments or reject the trustee’s decision. After examining any new information, the trustee makes a final decision.

Beneficiaries of non-self managed super funds who are not happy with this decision may complain to the Super Complaints Tribunal. However, this tribunal doesn’t deal with SMSF cases, so SMSF beneficiaries with complaints would need to try a number of other mechanisms, such as taking the matter to court.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in today’s Switzer Super Report

• Roger Montgomery: Is Qantas about to become the target of a takeover?
• Peter Switzer: Will Bernanke save our stocks?
• Paul Rickard: Can you do better than ‘guaranteed’ annuity?