Income Protection policies are generally available in superannuation including Self Managed Superannuation Funds (SMSF) (where the trust deed allows). Income Protection in superannuation is also commonly referred to as Salary Continuance or Sickness and Accident Cover. Income Protection policies in superannuation overall operate in a similar fashion to personally owned Income Protection policies.
Superannuation funds determine what income protection policy options are offered with some funds offering more policy options than others. Self Managed Superannuation Funds, where the trust deed permits, can generally seek any income protection policy that meets the needs of the members.
Is Income Protection in Superannuation a good idea?
Superannuation can be utilised to own and fund income protection policies and by doing so can move the cost of coverage into superannuation, freeing cash flow that can be directed to other requirements. There are some disadvantages of income protection in superannuation however;
- Balance Erosion – holding Income Protection in Superannuation diverts funds from retirement savings and with all other factors being equal can mean you have less funds for retirement. In addition with reduced contributions caps for the over 50’s – there is less that can be contributed into superannuation for retirement to offset this impact.
- Deductibility of Premiums – Income Protection premiums are generally tax deductible and can reduce a person’s taxable income. This potential benefit is lost when Income Protection is placed inside superannuation.
- Superannuation Limitations – When Income Protection is in Superannuation, for a member to be paid a benefit the superannuation fund needs to ensure that the person meets a condition or release. This means that a person needs to meet the definition of the insurance policy and also the requirements of the superannuation fund. If the superannuation fund is not satisfied, the benefits can be held inside fund and in the case of self managed superannuation, where benefits are released incorrectly, the trustees are liable and the SMSF can be deemed non-complying!
- Policy Benefits – Some superannuation funds allow more comprehensive policies to be held in the fund including the option for retail policies to be held in the super fund. Although the premium cost is the same as holding it outside of superannuation, any benefit that is not compliant with a condition of release is generally removed from the policy or simply paid to the super fund and not released to the member. This may reduce the value of income protection in superannuation and could result in a person not being paid a benefit when they would have been if the income protection policy was not in superannuation!
I can get Income Protection in my Superannuation, are there any differences in policies?
Income Protection policies vary significantly between insurance companies and superannuation fund providers and it pays to consider the Product Disclosure Statement carefully to ensure that the features and benefits are suitable for your current circumstances. A policy that allows amendment flexibility to the policy options as your circumstances change may also be helpful. There are a number of conditions and definitions of Income Protection policies in superannuation that sometimes are difficult to interpret within the Product Disclosure Statement including;
- Pre-Existing Condition Clauses – Some superannuation funds offer Income Protection policies with no medical testing or medical history forms. If the insurance company does not want to know your medical history it may mean that they do not want to insure your medical history! Pre-existing condition clauses can also be somewhat vague to include medical consultations or even symptoms that may not have been investigated however should have been. We all take insurance for certainty – if you are looking for a higher level of claim certainty from a policy, make sure any possible pre-existing condition clauses provide that to you.
- Limited Waiting Periods and Benefit Periods –Some superannuation funds offer limited waiting periods and benefit periods with some superannuation funds only offering a 90 day waiting period. Some income protection policies in superannuation require you to exhaust all your sick leave before the waiting period starts – extending the time until payments are made. Additionally, some superannuation funds limit benefit periods to 2 years, meaning longer term income payments for permanent disablement is not insurable within the superannuation fund.
- Annually Reducing Coverage – It is also common for superannuation funds to offer unitised coverage. Not to be confused with a ‘level premium,’ this works by fixing the premium of the policy and having the cover reduce annually. Incomes generally increase, would an annually reducing policy pay you and your family enough if you were unable to work in the future?
We have seen some curious income protection definitions and clauses offered in superannuation funds and some of the benefits and consequences may not be easily found or determined by all those who read the lengthy disclosure documents.
With a 1 in 3 chance of having more than 3 months off work before turning age 651, Income Protection claims are increasing significantly year on year with hundreds of millions paid annually to people who are unable to work.2
With over 3503 superannuation funds operating in Australia and hundreds of insurance policies available both inside and outside of superannuation, a suitable policy it can be difficult to find. If you do not think you suit a ‘one-size fits all’ approach then comparing the options available to can mean the difference at claim time – the income may stop, but the bills do not!
Do you have any positive or negative stories about Income Protection in Superannuation? Comment with your stories or questions below.
Is Income Protection is Super right for me?
Insuring against illness and injury under superannuation is a big decision, a decision that if not made correctly could cost thousands if something went wrong! MoneyGeek wants to make sure our readers get easy to understand information to assist make the right financial decisions but to assist make the right decision, personal advice is needed. MoneyGeek has teamed up with Keyperson Insurance to provide Income Protection quote comparisons and advice for people considering Income Protection in Superannuation. For trusted, confidential and individualised advice, complete and enquiry and an experienced adviser from Keyperson Insurance will be in contact to discuss your details.
About the Author – Benjamin Irons
Benjamin has been involved in the financial services industry since 2004. Benjamin has a Bachelor in Business, Diploma of Financial Services (Financial Planning). Previously a Financial Adviser and a business owner, Benjamin has worked with hundreds of individuals and businesses to implement simple strategies to improve wealth. Benjamin writes for a number of websites to assist people take control of their finances and find their financial freedom!
1CommInsure Claim Statistics 2008
2The Risk Store Industry Claim Statistics
3ASFA Superannuation Statistics August 2012 – Excluding SMSF’s