Income Protection: Inside Or Outside Of Super

Income protection pays a monthly benefit of up to 70% of your regular pre-tax income if you can’t work due to serious illness or injury. Losing the ability to earn an income to fund living expenses could run down savings levels and cause financial difficulty.

Many Australians hold default Income Protection insurance through their superannuation fund. You can also apply for income protection insurance through your super fund or by applying directly with a retail insurer. You may also be covered under a policy owned by your employer or union.

When thinking about whether insurance should be held inside or outside of superannuation, it is important to note some of the key features which are detailed in this article. There are both advantages and disadvantages to both ownership structures. The below lists are not exhaustive therefore we always recommend speaking to your superannuation fund directly or a financial adviser that provides advice on risk insurance.

This article will address the key differences between the two ownership options.

Advantages:

• For clients who have Income Protection cover in an insurance only superannuation fund, they may be entitled to an upfront 15% premium rebate on rollovers made to the fund to pay for their premiums. The 15% rebate represents the tax concession the fund trustee receives from claiming a tax deduction on premiums paid, which is passed back to members.
• The trustee of the superannuation fund will generally withhold PAYG tax on benefit payments before the monthly benefit is paid to the client.
• Premiums can be funded from employer contributions, member contributions or by using their existing superannuation fund balance, which may assist clients with managing their cash flow and with affordability of their premiums.

Disadvantages:

• Premiums can erode retirement savings if clients don’t make extra contributions to negate premium cost
• Payments may be delayed as the insurance benefits must be paid by the insurer to the trustee first.
• In addition to meeting the insurance policy definition of incapacity, the client must also meet the temporary incapacity condition of release under superannuation law before the trustee can pay the income protection benefit to the client.

Income Protection outside of superannuation:

Advantages:

• Premiums are generally tax deductible for the client if they are both the life insured and the policy owner
• May be able to exchange ongoing payments for a lump sum benefit
• Can provide protection even if their life insurance is not employed at the time of incapacity
• This cover may provide more comprehensive cover when compared to a default group Income Protection policy through super
• Claims may be processed fast as the insurer only has to deal with the policy owner/insured person. There is no approval needed from a superannuation trustee should a benefit amount be payable

Disadvantages:

• PAYG tax is generally not withheld from benefit payments, clients may have to budget for their tax liability within that particular income year.

– The information provided here is general only and does not consider your personal objectives, financial situation or needs. Before you decide to purchase a product, it is important to read the relevant PDS.