Income protection through superannuation

Income protection insurance (sometimes called salary continuance cover) pays a monthly benefit if you’re unable to work due to an illness or temporary disability, after serving a waiting period. Benefits are paid for a period of time (e.g. 5 years or until you turn 65, or until you return to work, whichever is sooner). This is referred to as your benefit period.  With income protection insurance you’ll receive a benefit payment that can replace up to 70% of your pre-disablement income, giving you the peace of mind to recover without having to worry about rushing back to work.

If you lose your job due to redundancy or termination, you won’t be eligible to claim on your income protection insurance. Your total benefit payment amount could also be affected by any workers’ compensation claims or other payments replacing your income, such as sick leave, depending on the policy terms.

When income protection is funded through super, you have the option of either a group policy or a standalone policy.  Group policies offer a default level of cover to all super fund members, meaning that the default cover is typically not tailored to your individual needs.

Alternatively, when you apply for standalone income protection through an insurance provider, they will assess a range of factors (e.g. your health, occupation, etc) to determine your risk profile and eligibility for income protection insurance. These variables will be used to determine the level of cover and terms of the policy. For further information with respect to any potential policy you are eligible for refer to the relevant Product Disclosure Statement (PDS).

When choosing between a personally owned or super owned policy, there are a few variables you may wish to consider. Ask yourself:

• Does your current super fund offer income protection?
• How much cover do you need? Would you feel more comfortable with a higher amount of cover?
• Can you afford to pay the standalone policy premiums from your own income?
• Are you comfortable with the terms, requirement to meet the conditions of release and exclusions that come with income protection within super? Of course, you should also consider the terms and any exclusions applicable to a standalone policy.

Also, consider the pros and cons listed below and how they pertain to your situation when deciding whether to purchase a personal policy or one through your super.

Australian superannuation funds can offer income protection insurance as part of their default insurance plan. Your insurance premiums may be deducted from your super account balance. In return, you could be covered by not only income protection, but also:

• Term life. Sometimes called death cover, this insurance product can pay a lump sum to your family or another beneficiary if you become terminally ill or pass away.
• Total and permanent disablement (TPD). This insurance can pay a lump sum if you become totally and permanently disabled and unable to work again.

• No shopping around necessary. Super funds often offer a default income protection for their members. This may be advantageous if you are unable to obtain insurance elsewhere due to your medical history or pastimes.
• Easy to pay. Premiums are automatically taken from your super balance .  As premiums are taken from your super balance, this may have an impact on your superannuation retirement savings. You also can fund your premiums through contributions.

• There may be more exclusion criteria or terms of cover applicable. This will depend on the policies being compared and the person applying.
• Can’t claim on tax from your own tax return. Because you pay for your income protection from your superannuation, you’re unable to claim those premiums on your tax return each year (as opposed to standalone income protection policies outside of super where premiums are generally tax deductible).
• Subject to terms and conditions. Depending on your super fund, type of insurance and circumstances, your cover could be cancelled if your superannuation balance falls under $6,000, your account becomes inactive over 16 months or you’re a new member under 25. You may be able to opt-in to cover, even if one of the above applies to your super account,  depending on your fund.
• Age limits for young adults.  if you’re under the age of 25, have a balance less than $6000 or your account becomes inactive, default insurance won’t automatically apply and you will need to opt in to be covered by the insurance.
• Less money in your super fund. Premiums for income protection come from your super balance , which reduces your total retirement savings. It may not seem like much in any given year, but the loss can potentially equal thousands of dollars over a few decades.