These types of arrangement are prohibited because the insured benefit will not be consistent with a condition of release in respect of the member receiving the benefit, the ATO said.

Speaking to SMSF Adviser, AMP SMSF’s Peter Burgess said this could increase the risk of limited recourse borrowing arrangements, given that cross-insurance is used as a risk mitigation strategy.

“It’s called cross-insurance because when one member dies or becomes TPD, for example, then the proceeds instead of being added to their account go to the other member," Mr Burgess said. "If the proceeds are just added to the deceased member’s account then it doesn’t provide any liquidity benefits for the fund.

“But if the proceeds are added to the other member’s account, the surviving member, then the fund can use that money to retire debt. So these type of strategies are commonly used where there’s a limited recourse borrowing arrangement in place.”

In light of the statement from the ATO, SMSF practitioners should think about other ways in which their clients’ funds could service a debt in the event that one of the contributors to the fund dies, Mr Burgess said, given that this option no longer seems to be available.

Generally speaking, insurance inside super is now “far easier to understand”, CommInsure's executive manager for insurance tech and business delivery, Jeffrey Scott, told SMSF Adviser.

“Whether it’s inside a self-managed super fund, an industry super fund, or a retail super fund, the definitions for any new policy from 1 July 2014 are going to be very consistent, very homogenous,” he said.