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SMSF Income Protection Insurance: How it works

Income protection through a self-managed super fund is good if you don't want out of pocket expenses, but it's not always cheaper than a standalone policy.

What you need to know

  • SMSF income protection provides you with a regular monthly payment if you get sick/injured and need to take time off work.
  • Optional benefit with a self-managed super fund.
  • Good option if you want to avoid out-of-pocket expenses, as premiums are paid with member contributions.

What types of insurance are available through a SMSF?

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Income protection insurance

SMSF income protection will generally pay up to 75% of your regular income if you are unable to work temporarily due to illness or injury. This protection is particularly important in the case of self-managed super funds, which are often run by self-employed people and small business owners, who would be particularly disadvantaged if they were unable to work.

What are the benefits and drawbacks of holding cover inside an SMSF?

Pros

  • Premiums are generally tax deductible
  • No out-of-pocket expenses (premiums are paid with members' contributions)
  • Increased cash flow for members outside of super because premiums are paid by the SMSF
  • Ability to customise insurance to suit members' specific needs (not always possible with a larger super fund)
  • Simple application process as underwriting is usually not required for the default level of cover

Cons

  • Can be more expensive due to the lack of access to the group insurance rates available to larger funds
  • Benefit payments paid to non-dependents are generally subject to tax
  • Medical underwriting is required (this isn't necessary with larger super funds)
  • Claims process can take longer due to trustee compliance requirements
  • Income protection benefits can only be paid for the period of incapacity (unlike outside super)
  • Retirement savings may be depleted due to insurance payments being taken from members' contributions

Finder survey: Have Australians of different ages lied on their income protection insurance policy?

Response65-74 yrs55-64 yrs45-54 yrs35-44 yrs25-34 yrs18-24 yrs
I've never lied on an insurance policy2.86%6.98%18.13%16.75%12.39%5.15%
I lied on my current policy0.52%1.38%1.03%
I've lied on a past policy0.51%0.46%1.03%
Source: Finder survey by Pure Profile of 1110 Australians, December 2023

Tax disadvantage to holding income protection cover in an SMSF

Why? Income protection premiums are tax-deductible both inside and outside of super. This is because the ATO views income protection as a replacement for normal salary and wages.

The benefit of a tax deduction is limited to 15% inside super, and it can be up to 45% outside of super. Because income protection benefit payments are viewed as assessable income, they are also fully taxable, which may cancel out any benefits provided by a premium deduction.

SMSF income protection vs income protection outside of super

Deciding whether to have income protection insurance inside an SMSF or outside as a standalone policy will depend on your individual circumstances and needs. We've mapped out a few situations where each product could work best for you:

You are nearing retirement and need to put as much as you can into your superannuation... You could opt for income protection outside of super so that your fund is not being wasted by premiums.

You have limited cash flow and just need basic income protection... Income cover through your SMSF may be all that you require.

You are looking for specific features such as cover for cancer or specific injuries... A retail income protection policy can provide such cover, unlike cover through your super.

Still not sure which income protection product is right for you? Get qualified help to find the best cover for your needs

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