Should I Have Income Protection Through Super: The Pros and Cons
While we are a privately-owned business, the offers that appear on this site are from companies from which www.comparingexpert.com.au receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site.
While compensation arrangements may affect the order, position or placement of product information, it doesn’t influence our assessment of those products. Please don’t interpret the order in which products appear on our site as any endorsement or recommendation from us.
www.comparingexpert.com.au compares a select range of products, providers and services, but we don’t provide comparisons or information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.
Income protection insurance is designed to replace your income, up to 75%, if you are unable to work for a specified period due to an illness or injury. Most people earning a salary should consider income protection.
Taking out income protection through your super fund has its advantages and disadvantages. However, whether it's a good option for you depends on your unique circumstances and budget. Determine how much cover you'll need and for how long should you be unable to work, and whether taking out income protection through your superannuation will be sufficient.
Income protection (IP) insurance, also known as salary continuance, generally provides you with 75% of your regular income so you can still manage your expenses and debts when you can’t work because of an injury or illness.
The majority of superannuation funds in Australia offers some level of income protection cover, either through a group or individual policy. While premiums might be cheaper, because policies are usually bulk purchased, the policy benefits and features may not suit your individual circumstances or provide adequate coverage.
Buy Income Protection Directly
Maximum Monthly Benefit
Percentage of Income Covered
NobleOak Direct Income Protection
Receive up to 75% of your monthly income with Income Protection Insurance. Cover essential living expenses when you’re unable to work due to an illness or injury. Consider the PDS. Issuer is NobleOak Life Limited ABN 85087648708. AFSL 247302.
A group policy is when your super fund makes cover available for eligible members within the fund.
If you want a retail income protection policy from another insurer, you can request the policy be funded by your super fund by setting up the “Retail policy” in a superannuation environment (at no additional cost), and then you can rollover the funds form your existing superfund to fund the retail policy.
The pros and cons of income protection insurance inside superannuation
Advantages of super income protection
- Cover is usually cheaper when taking out a group policy through super, because superannuation funds purchase policies in bulk.
- Minimum impact on your current cash flow as premiums get deducted from your super account balance.
- You might be automatically accepted with a group policy inside super. People with pre-existing conditions or high-risk occupations can potentially get some level of income protection via their super fund.
- Continue your coverage even when changing super funds, when you have a separate Retail policy.
Disadvantages of group income protection inside super
- Generally, restricted to indemnity policies. Traditional agreed value and guaranteed value income protection policies are no longer available for group policies within superannuation.
- The benefit amount is usually limited to what you earned 12 months immediately before temporary disability.
- Any excess funds, that do not meet a condition of release, will be retained in your superannuation fund .
- Generally, weaker policy terms and conditions. Group income protection policies usually require to use all your sick and holiday leave before your waiting period will start.
- Group polies are not guaranteed renewable, meaning the fund or insurer can down grade your policy terms and conditions at any time.
- You might be underinsured, for example, salary continuance in super might be limited to a maximum 2-year benefit period.
- Policies do not include ‘extra benefits' usually built-into self-owned retail income protection policies.
- No tax advantage as premiums are paid from your fund and any tax deductions will be provided to your fund.
- Less money goes toward your retirement savings because your income protection premiums are paid out of your superannuation.
- Claiming can be more complicated and time-consuming. You must meet both the policy definition as per the PDS and the SIS condition of release.
- Concessional contributions are capped at $25,000 per year because premiums form part of your contributions and thus reduce the amount you can contribute to your super pre-tax.
What to consider before choosing super income protection insurance
- Determine how long you want cover for. Many group income protection policies held inside super only provide coverage for 2 years. However, this depends on the insurer.
- There are additional features and benefits that are not available to group income protection policies held inside super, including: Accommodation and transport benefits, child care benefit, rehabilitation, nursing care, and counselling.
- Whether your income is consistent or fluctuates. Traditional agreed value or guaranteed value contracts are generally no longer available within superannuation.
Before you decide between income protection inside or outside super, make sure you understand the policy and perhaps seek further assistance from a broker or financial adviser, so you won’t be caught off guard with any unpleasant surprises.
Which is better, income protection inside or outside super?
|Income Protection||Group Policies Inside Super||Outside Super|
|Coverage||Coverage is limited to the income protection provided by your super fund.||Generally, provides more comprehensive coverage, including Plus or Standard policy features and benefits.|
|Policy options||Generally, only indemnity cover is available. Benefits are based on what you earned immediately before claiming.||You have the option of indemnity, agreed value or guaranteed agreed value policies, depending on your insurer.|
|How are premiums paid?||Premiums are deducted from your super fund’s investment balance. You usually do not need to make additional contributions.||Paid by you, the policyholder.|
|Cost of premiums||Generally cheaper since super funds in Australia have tremendous buying power and can negotiate better rates.||Premiums are usually based on various factors, like your age, health, cover type and amount.|
|Underwriting||No underwriting or medical information is usually required, because your policy is considered as part of a broader group.||Generally, your insurer might request some underwriting, depending on whether you purchase direct or retail. You’ll also need to supply proof of your earned salary either at application or claim stage.|
|Taxation benefits||Premiums are tax deductible to the super fund.||Premiums are generally tax deductible.|
|Retirement savings||Premiums are paid via your super fund, thus less money to invest for your retirement.||Your retirement savings will remain unaffected.|
|Claiming||You must satisfy the insurer and trustee before a benefit will be paid.||You only need to satisfy the policy terms and conditions, as detailed in the PDS, to receive your payout.|
Compare Income Protection Quotes
Splitting income protection ownership
By splitting or linking your self-owned income protection policy with a policy funded through super, your benefits could be paid from either portion of the policy. For example, if your income protection policy inside super doesn’t pay out, a portion of your income protection policy outside super might.
Available from select insurers, you can benefit from the savings your super fund provides in paying for premiums and have access to the benefits provided by your self-owned policy, including nursing care, transport within Australia and from overseas, and family care.
Generally, when claiming from a split income protection policy, the one held inside super will be paid once all the conditions of release have been met. Other potential portions of your claim not paid under your super policy can then be assessed against the income protection policy outside super.
When the temporary incapacity condition of release is met, your income protection benefit gets paid from the fund to replace in part or in full what salary you received before becoming incapacitated.
In some cases, the trustee of your superannuation may find that you have not met the condition of release and thus restricts the money released to you.
Frequently asked questions
Your decision to purchase income protection insurance inside or outside super should be based on your personal requirements and budget.
Compare Your Income Protection Options
We reveal the pros and cons of having life insurance through your super fund. Discover whether it’s wise to pay life insurance via your superannuation.
Learn about the pros & cons of life insurance inside your SMSF. While premiums may be tax deductible to the fund, benefit payouts could be complicated.
Discover the insurance policies available within Sunsuper; death cover, TPD & income protection. We give you insights into their Tailored Insurance options.
Discover the REST insurance automatically included in your superannuation and review the pros and cons of their death, TPD and income protection insurance.
We reveal what insurance types Australia’s largest super fund offers its members. Plus, find out if aged-based Australian Super income protection is worth it.
Pros and cons of life insurance held inside Hostplus Super. Review Hostplus life insurance products and determine if you should buy additional insurance.