Income Protection Inside of a Super Fund—What You Need to Know

Many people these days are choosing to have their income protection insurance within their super funds. Before we look at the positives, and the negatives, what actually is Income Protection?

Rate Detective Definition

Income protection pays you a monthly amount should you become totally (or with some policies partially) incapacitated for work due to an accident, illness or injury (including mental health). However this incapacitating does not have to be a permanent one. The benefits can be used to pay for your normal lifestyle and investment costs and mean you can maintain relative financial normality during this time.

let’s look at some of the advantages of setting Income Protection up through your super fund.

• Your individual cash flow is not affected as the premium is payed from within your super fund
• Retail insurance products often have more options in terms of features and benefits (e.g age 65 cover).
• If eligible you may be able to make tax deductable contributions to super to help pay your premiums with.
• You may be able to salary sacrifice to pay your premiums, bringing down you pre-tax income.
• Super funds can claim tax deductions on insurance premiums paid which are usually 15 per cent.

Okay so there’s some potentially attractive benefits, but what about the negatives.

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The negatives are worth considering and being prepared for, especially as they can sometimes make the claiming process problematic, and with an illness or injury, it might not be a time you want to deal with problems.

Some of the negatives of housing your income protection policy within super are:

• Super funds only offer indemnity policies
• Some retail funds do not allow income protection plus options, only allowing the standard package inside superannuation. Or if Plus options are available the difference in costs needs to be paid outside super.
• The tax advantages might be more outside superannuation depending on your individual circumstances.

The SIS Act's definition of 'temporary incapacity' requires the following key points to be met:

Gainful employment - the member must be in gainful employment before disability, and the disability caused them to cease gainful employment.

• Income immediately before disability - the payment out of super must not exceed the amount the member was earning immediately before disability.