Should You Have Income Protection Through Super: The Pros and Cons

Published: April 13, 2018

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. First, determine how much cover you'll need should you be unable to work for a period and whether taking out income protection through your superannuation will be enough.

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 and because they are bulk purchased you might get better rates. However, this group structure may not suit your individual circumstances.

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Can you have income protection through super?

Yes, income protection insurance is available from most super funds in Australia and can provide you with a regular income in the event you make a claim. However, as of 1 July 2014, the super laws have changed. Any income protection claim made on a policy purchased inside super after this date must first meet the temporary incapacity condition of release.

Take note; if you took out income protection inside super before 1 July 2014, your cover would continue as usual.

The pros and cons of income protection insurance inside superannuation

Advantages of super income protection

  • Easy application process. No medicals required.
  • Cover is usually cheaper because superannuation funds purchase policies in bulk.
  • Minimum impact on your cash flow as premiums gets deducted from your super account balance without you having to make additional contributions.
  • You might be automatically accepted. People with pre-existing conditions or high-risk occupations can generally get some level of income protection via their super fund.

Disadvantages of income protection inside super

  • Generally, restricted to indemnity policies. Traditional agreed value and guaranteed value income protection policies are no longer available within superannuation.
  • The benefit amount is usually limited to what you earned 12 months immediately before temporary disability.
  • Any excess funds received will be retained in your superannuation fund. Your paid leave entitlements or workers compensation will be built into the insurance contract to ensure the benefit you receive will not exceed pre-disability earnings.
  • You might be underinsured, for example, IP in super might be limited to a maximum 2-year benefit period.
  • Policies do not include ‘extra benefits' usually built-into self-owned 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.
  • You may not be entitled to IP benefits if you’re unemployed or a homemaker, or on sabbatical or maternity leave and not earning an income.
  • Claiming can be more complicated and time-consuming. You must meet the relevant condition of release if your policy is purchased after 1 July 2014.
  • 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.

The above disadvantages of income protection through super do not apply to policies purchased before 1 July 2014.

What to consider before choosing super income protection insurance

  • Determine how long you want cover for. Many income protection policies held inside super only provide coverage for 2 years.
  • There are additional features and benefits that are not available to 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 no longer available within superannuation.
  • Only people that are gainfully employed will be eligible to claim under a super-owned income protection policy.

Before you choose to take out income protection insurance through your superannuation, make sure you understand the policy and perhaps seek further assistance from your broker, so you won’t be caught off guard with any unpleasant surprises.

Which is better, income protection inside or outside super?

Income Protection 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 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 do not need to make additional contributions. Paid by you, the policyholder, either out-of-pocket or from your salary package.
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 insurer to receive your payout.

Should I take out income protection through super or on my own?

Income protection through super is likely the better option for people with uncertain and fluctuating cash flows, like business owners or people on a tight budget.

If you have sufficient and predictable cash flow or want to increase your retirement savings, then income protection outside super might be a better option.

Taking out income protection outside your superannuation fund provides you with complete control. You can generally customise your policy by choosing the waiting period and for how long you want the benefit to be paid. You can also shop around and compare income protection policies until you find one that you feel confident provides value for money.

Another option you might want to consider is splitting your income protection ownership between you super fund and your self-owned policy. By dividing ownership, you can benefit from the cheaper premiums inside super and supplement this with a policy outside super that provides cover for longer than the usual 2-year period your super might provide.

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Splitting income protection ownership

By splitting or linking your self-owned income protection policy with a policy funded through super, you can overcome the limitations of 1 July 2014 super law. When claiming, your benefits could be paid from either or both policies.

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. Any portions of your claim not paid under your super policy can then be assessed against the income protection policy outside super.

Claiming income protection through super

To be eligible to claim income protection benefits through your super fund, you must meet all the conditions of release. First, meet the required insurance definition, then your income protection benefit will be paid to your super fund. Secondly, the trustee of your superannuation must be satisfied that you meet the definition of temporary incapacity.

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.

Definition of temporary incapacity

Under the SIS Act, ‘temporary incapacity’ is defined when a member ceases to work because of ill health, whether physical or mental, which does not constitute permanent incapacity. Should you become permanently incapacitated, you can no longer receive the income stream.

Frequently asked questions

Is income protection in super tax deductible?

Yes, income protection held inside super are tax-deductible to the fund, but you will not receive this tax deduction. However, if you have income protection outside of super, the premiums are deductible. You'll also have to pay tax on the income protection benefit received from your superannuation, similar to those paid from income protection policies outside super.

Can I get income protection in my SMSF?

Yes, you can purchase and manage income protection through your self-managed super fund (SMSF). However, there are further restrictions imposed, and only certain types of income protection insurance can be held within SMSF. Also, several built-in features may not be available, for example, the premium waiver benefit, rehabilitation and accommodation benefit.

Can you have agreed value income protection in super?

No, only indemnity income protection is available for purchase through your super fund because of the Superannuation Act stipulating that the claim released from your superannuation should not be more than the income you were earning before becoming temporarily incapacitated.

Your decision to purchase income protection insurance through your super fund or independently should be based on your personal requirements and budget.

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