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

Russell Cain Fact Checked Updated: 29 September 2021

Income protection insurance is designed to replace your income, up to 70%, 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 a monthly benefit of up to 70% 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.

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Can I have income protection through super?

Yes, generally, income protection insurance is available through superannuation and you can usually choose to have a group of retail income protection policy funded by your super. An income protection claim made on a policy purchased inside super needs to meet both the insurer’s policy definition of a claimable event, and a temporary incapacity condition of release as defined under the SIS Act.

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

What to consider before choosing super income protection insurance

  1. 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.
  2. 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.
  3. 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 ProtectionGroup Policies Inside Super Outside Super
CoverageCoverage 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 optionsGenerally, 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 premiumsGenerally 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.
UnderwritingNo 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 benefitsPremiums are tax deductible to the super fund.Premiums are generally tax deductible.
Retirement savingsPremiums are paid via your super fund, thus less money to invest for your retirement.Your retirement savings will remain unaffected.
ClaimingYou 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.

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

Income protection through super might be a good option for people who do not have any disposable income, those on a very tight budget or anyone who cannot get a personal income protection policy. However, you’ll usually need to satisfy both the insurer’s definition of a claimable event and the super’s condition of release before a benefit will be paid.

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 maximum benefit period to be. 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.

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.

Claiming income protection through super

To be eligible to claim income protection benefits through your super fund, you must meet the insurer’s definition of a claimable event. After that, your income protection benefit will be paid to your super fund. Then, the trustee of your superannuation must be satisfied that you meet the definition of temporary incapacity, before releasing the benefit to you.

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.

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 generally tax-deductible to you. 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, generally only indemnity income protection policies are 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 inside or outside super should be based on your personal requirements and budget.

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