Bankruptcy, life insurance and superannuation

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If your client base includes business owners, chances are you have turned your mind to what might happen to their superannuation and proceeds from life insurance policies should their circumstances drastically change, and they become bankrupt.

Small firms (employing up to 19 people) account for around 98% of businesses in Australia. Unfortunately, a substantial number of these small enterprises fail. According to the Australian Small Business and Family Enterprise Ombudsman's Small business counts: small business in the Australian economy report of December 2020, the survival rate of small businesses as measured over the period from June 2015 to June 2019 ranged from 60% (for those with no employees) to 78% (for those with 5-19 employees).

Though no one is immune from bankruptcy, self-employed businesspeople, 'at risk' professionals (for example, doctors, dentists, lawyers, accountants, architects and engineers) and company directors are particularly vulnerable to lawsuits from disgruntled patients, dissatisfied clients, or vindictive former business partners. Successful litigation against these individuals may send them bankrupt, as can merely mounting a defence against a spurious claim.

This paper examines how superannuation interests and life insurance policies are impacted by bankruptcy proceedings. Interestingly, Australia's bankruptcy law provides certain exemptions, which means that proceeds from superannuation and life insurance policies may be protected from claims by creditors.

Knowing the ins and outs of the rules around bankruptcy may help financial advisers set up an ownership structure for life insurance policies which can be more appropriate for clients who are among those at high risk of becoming bankrupt due to the nature of their profession or business.