Losing the ability to earn an income can quickly run down your savings and cause financial difficulty. However, if this does happen due to serious illness or injury, income protection can pay you a monthly benefit up to 70% of your regular, pre-tax income.
The good news is, many Australians hold default Income Protection insurance through their superannuation fund. If it is not automatically covered under your superannuation, you can also apply for cover under 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.
About Income Protection Through Super
Most superannuation funds offer insurance for their members. There are many benefits of this ownership structure, although clients must be aware of the potential pitfalls too.
Advantages of Claiming Income Protection Through Your Super
- If you have income protection cover in an insurance-only superannuation fund, you may be entitled to an upfront 15% premium rebate on rollovers made to the fund to pay for your 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 your existing superannuation fund balance, which may assist with managing your cash flow and with the affordability of your premiums.
Disadvantages of Superannuation Income Protection
- Premiums can erode retirement savings if you don’t make extra contributions to negate the 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, you must also meet the temporary incapacity condition of release under superannuation law before the trustee can pay the income protection to you.
Pros & Cons of Income Protection Outside of Super
Pros:
- Premiums are generally tax deductible 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 your 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
Cons:
- PAYG tax is generally not withheld from benefit payments, clients may have to budget for their tax liability within that particular income year.
Income Protection in Super vs Outside
Ultimately, the decision of whether to keep your income protection in super vs. outside comes down to how much control you want over your policy. They can look very similar at first glance, but the specifics behind each option work quite differently. For instance, super-based cover not only has to follow fund rules, but also group policy conditions and superannuation laws. Retail cover (non-super income protection) gives you direct ownership and more influence over definitions, waiting periods and benefit periods.
Another important difference to consider is how each structure responds to changes in your employment. Income protection inside your super may reduce or change automatically if your job status changes, especially if you move into contract or self-employed work. Private cover stays consistent unless you choose to adjust it. This difference can really matter for anyone with variable income or a role that evolves over time.
The Limits You Need Need to Know About Super Income Protection
Super income protection is so often treated as a packaged safety net as it’s included in so many funds. But this doesn’t always reflect your actual financial needs. Group policies often place caps on the maximum benefits you can receive, and often offer shorter benefit periods. If your recovery takes longer than expected, you may find the payments fall short of covering your living costs.
Something else people also often aren’t aware of are the automatic changes made by the fund. Some superannuation funds reduce cover as you get older, change industries or stop contributing for a period. This often occurs without you realising. You should review your super-based policy regularly to make sure it still matches your income and lifestyle.
Claiming Income Protection Through Super
There are two assessments you will likely have to do to claim income protection through your super. These are the insurer’s assessment of your eligibility and the fund’s decisions about releasing money under the temporary incapacity condition of release. Even if the insurer approves your claim quickly, the fund may still need extra information before you can be paid.
During an ongoing claim, super funds may request updated medical forms, employer statements and other documentation at different points. This creates a more layered admin process than a retail claim. Being aware of these requirements early helps you prepare for the paperwork and avoid delays in receiving benefits.
Weighing up your options with an insurance broker can help you find the right coverage for your situation.
