Did you know you can take out income protection through super? Find out how it differs from standalone cover.
You may of heard about people using their superannuation fund to get income protection. In fact, most superannuation funds have an arrangement where life insurance is automatically included unless you 'opt-out'. While this isn't a recent development, many people find it confusing understanding how super income protection differs from a policy on its own.
What's the difference between a super and standalone policy?
The main difference between the two is actually quite straightforward:
- Income protection through superannuation. The policy's premiums are paid by your super fund contributions rather than your income or savings.
- Income protection outside of superannuation. You pay your premiums out of your own pocket, just like any other type of policy taken out with an insurance company.
However, the fundamental purpose of these two policy types are the same; to provide you with an income replacement in the event you are unable to work due to illness or injury.
Compare income protection insurance from Australian providers
- How do I know if I'm already covered by my super fund?
- What are the pros and cons of income protection through superannuation?
- Income protection and superannuation rollover; how does it work?
- Is income protection insurance through superannuation tax-deductible?
- Is income protection insurance through superannuation adjustable?
- When and how is a benefit paid for income protection through super?
- Should I get indemnity value or agreed value income protection through super?
- Is the level of cover provided inside super different?
- What should I think about when deciding if this is the right option?
Some super funds will automatically provide a default level of income cover when you sign up. For example, if you join Australian Super you receive automatic death, TPD and income protection insurance, with the premiums being deducted from your super account.
If you aren’t sure whether you have income protection cover or what level of cover you might have, the best thing to do is to read your product disclosure statement (PDS), which lays out the details of your super account.. This document will usually be provided to you by your super fund when you apply.
If you can't find your PDS check your funds website, it will generally be available there, or contact your provider directly and talk to a customer service representative.
Is there enough cover in place?This depends on personal preference. If you are after an affordable option that has less flexibility than a standalone policy, then superannuation income protection can be the right choice for you.
It is important to remember that income protection insurance through superannuation will often only offer the minimum level of coverage to the policyholder and will not allow much room to tailor the policy towards their specific needs.
For most of us, our ability to earn an income is our most valuable asset, which is why it’s so important to have income protection insurance. But whether it is held inside or outside superannuation can have a significant impact on its value.
- Affordable cover. Premiums are deducted from your super account, so there are no out-of-pocket costs for your insurance. As super funds buy their insurance at wholesale rates, your premiums may also be cheaper.
- Automatic eligibility for most funds. IP insurance through super is often automatic, with all members receiving the same level of cover, regardless of individual risk factors such as occupation or health status.
- Less management required. Because premium payments are deducted automatically, little management is required other than a periodic review.
- Your payments are automatically deducted. When you have cover through your super, the premiums are paid from your retirement funds, so you don't have any costs to cover now. Of course this is also the downside of insurance through Super as you are digging into your retirement funds
- Cost effective premium payments. When you pay for your income insurance through your super you are doing so with your contributions which have been taxed at the super contribution rate of 15%. However, if you take out a separate policy and pay for the premiums with your post tax earnings, you could have been taxed at a rate as high as 45%.
- Claims can be complicated and drawn out. Any claims on your IP cover must be made to both the insurance provider and the fund trustee, which can delay payment.
- Concessional contribution cap. Because premiums are included in the concessional contribution cap, they reduce the amount you can contribute to your super pre-tax.
- Restricted benefit period. Many super IP policies only provide benefits for a maximum of two years, which will be insufficient if your disability is long-term.
- Limited range of benefits and options: These policies may only include the bare benefits to policyholders, leaving them unprotected under certain events.
- Temporary incapacity definition. In order for a benefit to be paid, the super fund trustee will need to meet a specific temporary incapacity condition definition. Outside of super, the benefit will be paid provided you meet the definition of disability outlined in your policy.
- No ancillary benefits. The benefit amount may not be enough, as ancillary benefits cannot be included.
- Cover may end abruptly. If you move to a different super fund or your employer's contributions cease, your cover may end abruptly.
- Automatic cover. If you have more than one super fund, you may be paying unnecessarily for automatic IP insurance in both funds.
- Your retirement is funding your insurance. At the end of the day, choosing to fund your cover through your super does mean that your tucking into the funds originally meant for your retirement years.
- Taxation of benefit payments. You may be required to pay tax on some benefits. Tax deductions may only be available inside self-managed super funds or if you're self-employed
Not satisfied with your current policy inside super?
If you're not satisfied with the level of cover provided from your super funds income protection policy, the option exists to get income protection cover from a life insurance company while still funding the premiums with your super funds. This is known as a superannuation rollover
Key features of a super income protection rollover
- Continue to fund your income protection via your superannuation provided the fund and provider agree to work together.
- Keep your super in the current fund and simply rollover the required funds to the insurance company.
- Still take advantage of tax concessions where available.
- Choose how much you want to roll over each year.
An insurance adviser can help you find and compare different rollover options currently available.
In Australia, the premiums you pay for income protection insurance are normally tax-deductible, regardless of whether your policy is held inside or outside of super, as long as the benefit is paid in instalments that replace a regular income. However, circumstances that dictate how much you can claim include:
- How much you earn. If you are in a high income tax bracket and have income protection outside of super you can claim a bigger deduction (up to 45%), while the maximum that can be claimed on income protection held inside super is limited to 15%.
- The policy you choose. If you hold income protection inside super and the policy includes benefits that can’t be released according to the terms of the Superannuation Industry (Supervision) Act (SIS), a private ruling from the Australian Taxation Office will be needed to determine the tax-deductible portion of premiums paid.
If your income protection insurance is held inside super and you don’t believe the benefit amount will adequately cover your needs, it’s possible to change or increase your level of cover.
To demonstrate how this works, conditions relating to increasing cover for Australian Super's income protection policy are pinned below:
- Increase your cover when you join. The ‘Join Australian Super’ form allows you to increase your cover up to certain limits when you join without providing health information. You can do this only if you are under age 65, have never completed this form before, and have never transferred cover or changed your work rating, waiting period, amount of cover or type of cover.
- Increase your cover at any time. Australian Super’s ‘Change Your Insurance’ form allows you to increase your cover at any time as long as you supply detailed health information and undergo an assessment by the insurer. You can increase your cover up to a maximum of 85% of your salary.
- Increase your cover when following significant life events. Australian Super’s ‘Application for Life Event Insurance Cover’ form allows you to increase your cover once per year within 60 days of any of the following life events occurring:
- Birth or adoption of a child
- Death of a spouse or de facto
- Ending of a de facto relationship
- Death of a spouse or de facto
- Taking out a mortgage to buy or build your main home in Australia
- Increase your cover when your salary increases: The ‘Application to Increase Income Protection Cover After a Salary Increase’ form allows you to apply to increase your cover once a year within 30 days of receiving a salary increase. You’ll be required to answer a few health questions and the maximum amount you can increase your cover to is 85% of your new salary.
- Reduce or cancel your cover: Australian Super’s ‘Change Your Insurance’ form also allows you to reduce or cancel your cover at any time. However, if you cancel your cover and wish to reapply for IP cover in the future, you will be required to provide health information and have your application assessed by the insurer.
To receive a benefit payment from income protection insurance held inside super, you will need to satisfy both:
- Your insurer and;
- Your fund's trustee
Criteria one: You meet the insurer’s definition of partial disability.
While definitions vary between insurers, partial disability normally means that:
- You are unable to work in your own occupation at full capacity due to illness or injury.
- You are not totally disabled and are working in your own occupation in a reduced capacity or working in another occupation.
- Your monthly income is less than your income prior to your disability.
- You are following the advice of a qualified medical practitioner.
If the insurer determines that you are partially disabled according to criteria such as these, your benefit will then be released to the trustee of your super fund. The benefit amount is calculated based on your pre-disability income, which is your income over the 12 months immediately prior to you becoming incapacitated. Normally, 100% of this amount will be paid.
Criteria two: Trustee determines if your case satisfies the 'conditions of release'
A superannuation's condition of release is usually when the policy holder meets the definition for ‘temporary incapacity’. According to this condition, you must have:
- Temporarily ceased work due to illness or injury, and
- You must not be permanently incapacitated
If you satisfy such a condition, the trustee will then pay the benefit to you, generally for a period of up to two years. If you fail to satisfy a condition of release, the benefit will be retained in the fund.
There are two types of income protection benefit amounts:
- Indemnity value. In an indemnity value policy, you are insured for the amount of salary you are earning at the time of making your claim.
- Agreed value. In an agreed value policy, your benefit amount is based on the income you were earning prior to applying for your policy. It’s a pre-agreed fixed amount regardless of changes in your income.
While an agreed value policy benefits you by paying the agreed benefit amount even if your salary is reduced after taking out your income protection cover, it does have certain drawbacks you should be aware of:
- It‘s generally more expensive than an indemnity value policy.
- It’s only useful for those who took out such a policy prior to 1 July 2014, as legislation has changed and agreed value policies are no longer available inside super.
- There is always a risk that the amount payable will exceed the allowable benefit payment under the super ‘temporary incapacity’ condition of release, in which case the excess amount will be retained in the fund.
Given these factors, an agreed value policy may be more beneficial to someone with a fluctuating income, such as a self-employed person, while an indemnity value policy would better suit those with a reliable regular income.
Yes, in most circumstances you will find the level of cover offered by income protection insurance held inside or outside super differs in the following ways:
- Income protection insurance held inside superannuation. Will typically provide a more basic level of cover. It pays you the income you were receiving prior to becoming temporarily disabled and nothing else. So you could find that it’s not enough to meet your financial needs if your situation has changed since your initial cover began.
- Income protection insurance held outside super. On the other hand, policies offered by life insurers may include features and options not available through super funded policies. These can include benefits such as cancer cover, specific injury benefit, return-to-work benefit, crisis benefit and needle-stick injury benefit for medical professionals.
Deciding whether to have income protection insurance inside your superannuation or as a standalone policy will depend on your individual needs and circumstances. Just some of the factors to consider when weighing up which option is more suitable include:
- The impact on your day to day cash-flow by funding premiums outside of super.
- The tax-effectiveness of both options for your situation.
- Access to benefit payments.
- Level of cover and range of features.
Weighing up all the pros and cons of income protection through super against your personal circumstances can be complicated. You can make a secure enquiry to receive a quote for cover or find out more by entering your details in the form above.