Superannuation Income Protection

Did you know you can take out income protection through super?

You may of heard about people using their superannuation fund to get income protection. In fact, most superannuation funds have an arrangement where salary continuance 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.

Is income protection cover inside super worth keeping?

While ditching your super income protection will mean you avoid fees and have a greater super balance, there are some drawbacks. We recommend:

  • Considering your life stage and circumstances. While being without any dependants means you might not need death cover, having income cover is worth considering e.g. you have a mortgage.
  • Keeping income cover, changing or cancelling. Decide if you have enough for your needs. Decide between whether you want cover inside or outside super. Cancel it if it doesn't make sense to keep cover.

Life circumstances where keeping income protection could make sense

Income protection insurance makes a lot of sense for certain people. If you're in any of the following situations, you should consider leaving your super income protection insurance right where it is:

  • You or your dependents rely on your income. If you couldn't work for a while, would you or your loved ones be able to continue on with their quality of life? Income protection insurance makes sure you can still pay for groceries, school bills, extracurricular activities and childcare.
  • You have a mortgage or other large bills. Your bills will keep on coming even if your income stops. Income protection insurance will allow you to keep up on payments so that you don't go into default or worse.

Superannuation cover vs standalone

Some of the key differences between the two types of cover include:

Super income protection

  • The fees of the policy are paid by your superfund rather than your income or savings but your final super balance will be less.
  • There may be less cover than you actually need however it's usually cheaper.
  • Pre-existing conditions and dangerous occupations may be covered if the insurance provided as default cover through your employer but it's crucial to check.
  • There may be an exclusion period for pre-existing conditions if you are not 'at work' the day your cover starts.

Outside super

  • You pay your premiums out of your own pocket but this means your superfund balance is untouched.
  • Cover is more tailored to your needs .
  • Pre-existing medical conditions and dangerous jobs are assessed on an individual basis.
  • If you have an existing condition or dangerous job you may not get cover or have to pay a higher premium.

AustralianSuper - Pre-mixed Balanced Super Fund Offer

AustralianSuper - Pre-mixed, Balanced Super Fund

AustralianSuper - Pre-mixed Balanced Super Fund Offer

  • 2019 Finder Awards Winner: Best Super Fund - Balanced
  • Join and consolidate your super with the easy-to-use mobile app
  • Australia's best performing growth fund over 10 years*
*To June 2019, according to Chant West. Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.
Promoted

Compare superfunds and income protection

Name Product Past Performance - 1 Year Past Performance - 3 Years Past performance - 5 Years Calculated fees p.a. on $50,000 balance
AustralianSuper - Pre-mixed, Balanced option
8.67%
10.72%
9.48%
$437.65
The Balanced option is a pre-mixed, MySuper fund that invests in a diversified range of asset classes.
AustralianSuper is an award-winning industry super fund and is the largest super fund in Australia.
Sunsuper Lifecycle Balanced
8.52%
10.48%
8.9%
$523
The Lifecycle Balanced option is a MySuper product that invests your super in a balanced fund until you’re near retirement.
Earn a Retirement Bonus of up to $4,800 when you open a new Income account. T&Cs apply.
QSuper Lifetime - Aspire 1
11.03%
9%
9.74%
$395
The Lifetime option is a MySuper product that adjusts your investment mix each 7-10 years as you get older.
QSuper is a member-owned super fund and is one of the largest super funds in Australia.
Virgin Money Super - Lifestage Tracker
-1.36%
N/A
N/A
$358
The Lifestage Tracker is a MySuper product that invests in a range of asset classes in line with your age.
Earn Velocity Frequent Flyer Points for making contributions to your super. T&Cs apply.
LGIAsuper MySuper Lifecycle - Under 75
7.27%
9.06%
7.79%
$598
The LGIA MySuper Lifecycle option aims for higher returns while you’re under 75.
LGIA is a medium-sized, member-owned super fund open to all Australians.
Australian Catholic Super Lifetime - Grow
6.03%
N/A
N/A
$573
The LifetimeOne investment option is a MySuper product that changes your investment mix as you get older.
A Catholic super fund open to all Australians and designed for people working in Catholic education, healthcare or aged care.
Superestate Balanced Essentials
New Fund
New Fund
New Fund
$291.50
The Balanced Essentials fund invests in a range of shares, residential property and other assets and has a medium level of risk.
Superestate focuses on investing your super in physical residential properties and charges some of the lowest annual fees in the market.
First State MySuper Life Cycle Growth
7.71%
10.09%
8.3%
$549.42
This MySuper product will invest your super in a pre-mixed Growth fund until you’re 60, then it’ll switch to Balanced.
First State Super is a not-for-profit super fund with more than 750,000 members around Australia.
HESTA - Core Pool
7.25%
9.58%
8.32%
$548.53
The Core Pool invests in a mix of asset classes and is an authorised MySuper product.
HESTA is an industry super fund open to all Australians and designed for employees in the health and community services sector.
BT Super for Life - MySuper Lifestage Fund
-2.16%
5.03%
5.41%
$643
The MySuper Lifestage fund invests your super in a mix of asset classes depending on how old you are.
Westpac Group customers can manage their super alongside their day-to-day bank accounts.
Cbus Growth
6.99%
9.9%
9.03%
$565
The Growth fund is a pre-mixed investment portfolio and an approved MySuper product.
Cbus is a leading industry super fund for the building and construction industry, that’s open to all Australians.
BUSSQ MySuper Balanced Growth
4.88%
7.79%
8.03%
$682.65
The MySuper Balanced Growth option is a ready-made, diversified fund with a medium level of risk.
BUSSQ is an industry fund designed for the building and construction industry and open for all Australians.
Suncorp Lifestage Fund
-1.04%
4%
5.27%
$581.80
The Lifestage Fund readjusts your investment mix every few years to reduce your level of risk as you get older.
A retail super fund that offers access to personalised financial planning and advice.
HostPlus Balanced
6.8%
10.8%
9.65%
$546.76
The Balanced fund invests your super in a range of assets and is designed for high long-term growth.
An industry super fund open to all Australians with a focus on the hospitality and retail sector.
MTAA My AutoSuper (Balanced)
7.66%
9.33%
9.03%
$469.76
The Balanced option is a MySuper product that invests in a range of asset classes aiming for medium to high long-term returns.
MTAA is a national super fund available to all Australians with a focus on the motor trades and automotive sector.
MLC MySuper Growth Portfolio
N/A
N/A
N/A
$728
The Growth option is a diversified portfolio that aims for high growth over the medium to long term.
MLC is a large retail fund open to all Australians. MLC is the wealth management arm of National Australia Bank.
REST Super - Core Strategy
5.94%
8.57%
7.36%
$497.60
The Core Strategy is a diversified investment portfolio that balances risk and return, and is an authorised MySuper product.
REST is an industry super fund tailored towards the retail sector and open to all Australians with almost two million members.
UniSuper Balanced
9.88%
9.97%
9.35%
$361
The Balanced option is a MySuper product that invests in a mix of growth and defensive assets.
A flexible industry super fund for people who work in Australia’s higher education and research sector.

Compare up to 4 providers

The information in the table is based on data provided by Chant West Pty Ltd (AFSL 255320) which is itself supplied by third parties. While such information is believed to be accurate, Chant West does not accept responsibility for any inaccuracy in such information. Chant West’s Financial Services Guide is available at https://www.chantwest.com.au/financial-services-guide . Finder offers no guarantees or warranties about the data and we recommend that users make their own enquiries before relying on this information. Performance, fees and insurance data is based on each fund's default MySuper product. Where the performance, fees and insurance data for the MySuper fund vary according to the member's age, results for individuals between 40-49 years of age have been shown. Past performance is not a reliable indicator of future performance.

*Past performance data is for the period ending December 2018.
Disclaimer: Performance, fees and insurance data is based on each fund's default MySuper product. Where the performance, fees and insurance data for the MySuper fund vary according to the member's age, results for individuals between 40-49 years of age have been shown. This article is general advice. You should consider your own personal circumstances before deciding if a superannuation product is right for you. Superannuation is a long term investment and past performance is not indicative of future performance.

Income protection or 'salary continuance' is often included with superannuation but is it enough?

This depends on personal circumstances. 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.

Comparison of income cover inside super funds vs outside

We took a quick look at the type of income cover that's offered inside super funds and outside super funds.

SuperfundWaiting periods offeredMaximum cover offered*Breakdown
Hostplus – Balanced30, 60, 90 days90% of income capped at $30,000 per month15% goes to super, 75% is income replacement
Cbus – Growth (Cbus MySuper)30, 90 daysUp to 85% of income capped at $9,600 per month10% goes to super, 75% is income replacement
AustralianSuper – Balanced30, 60 daysUp to 85% of income capped at $30,000 per month10% goes to super, 75% is income replacement
UniSuper Accum (1) – Balanced30, 60, 90 daysUp to 85% of income capped at $29,900 per month15% goes to super, 75% is income replacement
CareSuper – Balanced30, 60, 90 daysUp to 85% of income capped at $40,000 per month10% goes to super, 75% is income replacement
Non-super coverWaiting periods offeredMaximum cover offered*Breakdown
TAL Accelerated Protection Premier Plan
  • 2, 4, 8 , 13 or 26 weeks
  • 1 or 2 years.
Up to 75% of income capped at $60,000 per month75% is income replacement.
Clearview Income Protection
  • 14, 30, 60, 90 or 180 days
  • 1 or 2 years
Up to 75% of income capped at $40,000 per month75% is income replacement

Information last checked as accurate September 2017. *Maximum benefit limits are offered based on various policy conditions. Always check with the insurer or superfund to find out what your maximum cover is.

Australian Financial Reviews' best superannuation income protection policies

The Australian Financial Reviews' 2016 Blue Ribbon Awards uncovered the top income protection policies in Australia. Key focus areas included: balance of features and pricing as well as a flexible policy that accommodates to the policy holder.

Best income protection policy for superannuation*

PolicyAwardProduct details
OnePath OneCareBest policyVery clear definitions on disabilities with competitive pricing. Widest range of options on policies that were compared. Some features include waiting periods from 14 days to 2 years and a booster option.
TAL Accelerated ProtectionHighly commendablePremiums are waived when total disability benefits are being paid.
Comminsure Income Care PlusHighly commendableTailor cover with options such as rehabilitation benefits and unemployment loan repayment benefits.

How do I know if I'm already covered by my superfund?

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.

What are the pros and cons of cover inside super?

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.

Advantages

  • 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%.

Disadvantages

  • 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

Superannuation rollover: Fund a standalone policy with your super contribution

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.

Is income protection insurance through superannuation tax-deductible?

In Australia, the premiums you pay for income protection insurance are normally tax-deductible when held outside super. When held inside super you won't be able to claim a direct tax-deduction, however you can receive a tax benefit when you contribute pre-tax income towards your super. When you contribute pre-tax income, you are taxed at 15% (as opposed to your marginal rate).

How much is tax-deductible?

Note, the 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 you can save 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.

Is income protection insurance through superannuation adjustable?

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:
    • Marriage
    • Divorce
    • 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.

When and how is a benefit paid with a super policy?

To receive a benefit payment from income protection insurance held inside super, you will need to satisfy both:

  1. Your insurer and;
  2. Your fund's trustee

General criteria

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.

Should I get indemnity value or agreed value income protection through super?

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.

Is the level of cover provided inside super different?

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.

What should I think about when deciding if this is the right option?

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.

Receive a quote for income protection insurance through superannuation from an adviser

* The products compared on this page are chosen from a range of offers available to us and are not representative of all the products available in the market. There is no perfect order or perfect ranking system for the products we list on our Site, so we provide you with the functionality to self-select, re-order and compare products. The initial display order is influenced by a range of factors including conversion rates, product costs and commercial arrangements, so please don't interpret the listing order as an endorsement or recommendation from us. We're happy to provide you with the tools you need to make better decisions, but we'd like you to make your own decisions and compare and assess products based on your own preferences, circumstances and needs.

Was this content helpful to you? No  Yes

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Ask a question
Go to site