Income Protection Through Your Super - Pros And Cons

There are pros and cons to taking income protection insurance through your Super.

Questions are being raised as to whether your superfund is the best place for all your cover. Superannuation funds have long provided a minimum amount of life insurance to members but many are now starting to add other types of insurance - income protection insurance is one of them.

Income Protection inside AustralianSuper

AustralianSuper which has more than 1.4 million members, recently announced that they would make income protection automatic from early next year in conjunction with life cover.

AustralianSuper combined with Tower Australia are to provide default income protection cover that will pay 75% of your salary, plus extra 10% contributions for up to two years in the event of illness or accident.

Advantages of Income Protection inside Super

Experts are saying that there are advantages to buying some types of insurance through your super but people need to be vigilant because super based insurance is more complicated and premiums will eat away at retirement savings. Policies that are group structured may not necessarily suit an individual's circumstances.

Roy Agranat a risk specialist at Centric Wealth has stated that there are three main advantages of income protection insurance inside super:

  • They are generally cheaper as you are accessing wholesale rates.
  • Group policies involve "automatic acceptance" up to a set level of cover with no medicals being required.
  • "Smokers and non-smokers pay the same rate".

Greg Staunton a senior insurance manager at AustralianSuper has stated that its members will have access to as much as $20,000 a month in income protection without having to undergo any medicals, under automatic acceptance.

There are no restrictions on occupation in the AustralianSuper scheme, whereas non members might find an insurer will not cover a certain job type because it's considered too risky.

Another further advantage of super based insurance is that it overcomes indifference. Out of 100 people in a group plan only a small percentage would probably have taken out personal income protection. This gives them the added advantage of not having to look for it. Young single people seem to think that it will never happen to them, so they don't think that income protection is important at this stage in their lives, yet their biggest asset is their ability to generate an income.

Sean McCormack head of insurance products at MLC stated that super based insurance is also cost effective because you are paying for it with money that is being taxed at the 15 per cent super contributions rate rather than at the personal tax rate that could be as high as 45 per cent.

It's not true for income protection insurance as with income protection you are entitled to a tax deduction on a private policy anyway.

Disadvantages of Income Protection inside Super

While Agranat believes that there are more pros than cons he warns consumers that there are disadvantages that need to be taken into account.

The main one is an added layer of complexity in the event you have to make a claim. You not only need to satisfy the insurer to receive a payout, you also need to satisfy the trustee of the super fund. You do not actually receive the benefit it goes via the trustee and you have to meet a condition of release.

Staunton of AustralianSuper agreed that the trustee had to make its own judgements, but the conditions of release had been in place for quite some time.

Staunton also admitted that if he had to choose whether to be insured inside super or outside super he would without a doubt be insured through a super fund. The important fact is that you have a large independent party acting on your behalf and that carries a lot of power.

Agranat stated that consumers need to compare the terms and conditions of the policies on offer from their super fund with those available outside.

The AustralianSuper cover stops payouts after two years, but it is better to have an income that lasts to age 65 even if you do receive a lump sum for, permanent disability at some point.

Agranat also pointed out that people need to know whether there is an option to continue the cover in a private capacity should they leave the super fund or a particular occupation and on what terms and conditions.

Paying premiums via super may be cost effective but people don't appreciate the impact on retirement savings. Your super fund is being reduced by the cost of the insurance. But to say that you are not paying for it yourself is incorrect, as you are paying for it out of your retirement funds.

Key points to remember

When considering of taking income protection insurance through your super please remember these points:

  • Super based income protection insurance is cheaper.
  • Avoid loadings and exclusions because of pre-existing conditions.
  • The claim has to get a tick of approval from the fund trustee as well as the insurer.
  • Premiums will destroy your retirement savings.

If you want to compare income protection insurance policies outside the super - please call us on 1300 793 143 or fill out the form on the right side of this page and experienced financial adviser will provide you free and no obligation quotes from all major insurance companies in Australia.

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Published on April 4-th, 2010 in Income Protection Insurance
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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