Does your superannuation give you income protection?

If you and your family would struggle without the money you earn from working, income protection insurance could be essential protection for your lifestyle and peace of mind. But should you take out income protection insurance through your superannuation or directly through a policy you choose for yourself?

Here are some of the things you need to think about before you make a decision.

Income protection through super

Taking out income protection insurance through your superannuation has both pros and cons, but it generally depends on your situation.

Since superannuation funds take out policies in bulk, they can sometimes offer cheaper cover. Since you use pre-tax super contributions to cover the cost of your income protection insurance premiums, they may cost you less than they would if you paid them after tax, however, keep in mind this means fewer funds are going toward your retirement savings. You should seek advice from a professional regarding your situation.

Pre-tax Income refers to the total remuneration or income you receive through personal exertion. For employees, this is the total annual remuneration paid to you by your employer, before tax, and excluding super contributions. Remuneration includes salary, regular commissions and regular bonuses.

Apart from these benefits, there is also another factor to consider when considering taking out income protection through superannuation, and that is, the claims process.

Claiming income protection through super

If something happens and you need to claim on your income protection insurance the fund manager needs to decide whether you meet the fund’s conditions of release – the rules that allow them to pay money to you.

Depending on your individual situation, income protection through superannuation may also be unitised – set at a fixed amount, rather than as a percentage of your income. You need to consider if this will be enough cover if you claim to ensure you are able to maintain paying the bills.

Income protection insurance outside your superannuation fund

The alternative is to take out income protection insurance directly from an insurer, outside your superannuation, where you can cover a portion of your monthly income. The biggest advantage of this approach is that it gives you complete control to shop around and choose the policy that offers the best value for money for your needs.

You can also customise your policy to suit your situation, such as choosing the waiting period, the length of time you’d like to be covered, and the benefit amount. That allows you to tailor your cover to suit your needs and your budget.

When you take out income protection insurance outside superannuation, you can generally claim a tax deduction for your insurance premiums, But remember, everyone’s situation is different, so talk to a professional to find out if you are eligible.

Ultimately whether you purchase income protection through your super fund or directly from an insurer will depend on your personal circumstances. If you are unsure as to which solution may be right for you, consider obtaining the services of a financial adviser.

Income protection insurance could help to protect you financially in the future. Find out more about the benefits of Real Income Protection Insurance and how you can get started.