Why insurance is critical when SMSFs borrow to buy property

Many SMSFs that have used a Limited Recourse Borrowing Arrangement (LRBA) to acquire a property have little or no other assets in the fund. So when a member is disabled or dies, there is often not enough liquidity to pay a death or disability benefit and pay out the debt. To further complicate matters: It’s often not possible to pay death or disability benefits as an in specie transfer when the LRBA is still in place; only a limited range of beneficiaries are eligible to receive a death benefit as a pension; and if there are beneficiaries who are available and willing to receive a death benefit pension, the fund would still need enough liquidity to make the pension payments, as well as meet the loan interest. For more information, call David Reed on 8539 7233

Source: Damian Revell, SMSF Weekly 27/8/12