Income protection insurance through superannuation

For many of us, our income is essential for keeping our lives on track. It pays the bills, supports our lifestyle, and helps us plan for the future. But life can throw unexpected challenges, sickness, or injuries that can disrupt everything. What happens if you’re suddenly unable to work for weeks, months, or longer?

Income protection insurance is designed to replace part of your income during these times while you recover. What many people don’t realise is that this type of cover is often available through your superannuation, either automatically or as an optional add-on.

Understanding the connection between superannuation and income protection insurance can help you decide whether the cover is right for you, including what it covers, how premiums are paid, and how to make a claim. 

Key takeaways

• Premiums for income protection insurance through superannuation are paid from your super balance and taxed at 15%.
• The default income protection insurance policy in super offers automatic cover. 
• While income protection insurance through super can be more cost-effective, it can potentially reduce your retirement savings and offer limited flexibility in policy options. 

What is income protection insurance through superannuation?

Income protection insurance ​​through superannuation is an insurance policy held inside your super fund that provides regular payments if you’re unable to work due to sickness or injury. The premiums for this cover are paid from your super balance rather than your take-home pay.

Some super funds automatically include a default income protection insurance for their members. Wondering, “What is a 'default' income protection insurance policy in superannuation?” It’s the basic level of cover you will receive without needing to apply. Other funds may require you to opt in or complete an application. 

How does income protection insurance through superannuation work?

• Eligibility: Claiming income protection insurance through superannuation depends on meeting your fund’s policy rules. Different funds cover different events, so checking exclusions is essential.
• Access: If you’re under 25 or have a super balance below $6,000, you’re usually not going to receive automatic income protection insurance. Conversely, if you work in a higher-risk occupation, your fund is more likely to provide automatic cover, which you can opt to cancel if you wish.
• Cost: If you’re wondering “How much does income protection insurance in superannuation cost?” or “How to pay for income protection with superannuation?”, the premiums are automatically deducted from your super balance.
• Tax: Premiums for income protection insurance in superannuation are generally taxed at 15% since they come from concessional (before-tax) contributions, though high-income earners may pay an additional Division 293 tax on some contributions.
• Waiting period: If you need to make a claim, there’s usually a short waiting period (typically 30, 60, or 90 days) before payments begin. Again, it's important to check with your specific fund.
• Benefit period: After your claim is approved, you’ll typically receive around 70% of your salary. Payments continue for a set period, depending on your plan: up to 2 years, up to 5 years, or until the maximum age of 65. 

How to make an income protection insurance claim through your super fund

While every insurer is different, you’ll typically follow these steps when making a claim for income protection insurance through super:

1. Contact your super fund: Request the official claim form either online, through the mobile app, or over the phone. It should provide clear instructions.
2. Gather documents: Collect medical certificates, proof of income, and any required forms. You may need forms from your doctor, or you can submit existing medical information with your claim.
3. Complete and submit the form: Fill in your details and attach supporting documents before submitting.
4. Submit your claim: Send the form and documents to your super fund.
5. Wait for assessment: While your fund is reviewing your claim, you can track your claim at any time via your online account or app.
6. Receive decision: If approved, payments go to your nominated bank; if declined, you can review your options.

Pros and cons of income protection insurance through superannuation

Income protection insurance through super vs direct

You can also take out income protection directly from an insurer, outside of your superannuation, which allows you to choose a policy that best suits your needs. In fact, income protection insurance in super vs outside super has a few key differences. 

Income protection through your super is potentially more cost-efficient, and not just because it's paid through your super balance. Most super funds also offer other types of insurance available through superannuation, such as Total and Permanent Disability (TPD) cover and life insurance, which are usually bundled alongside income protection within the fund. Bulk arrangements can sometimes make premiums lower than if you went direct. However, it also offers less flexibility, and claims can take longer because you must meet super rules. 

In comparison, buying a policy directly from an insurer may give you more choice and the ability to choose from a wide range of policy features, often faster claims, and premiums are usually tax-deductible. However, you pay the cost from your own pocket, and it can be more expensive.

Ultimately, choosing between income protection insurance through super or directly with the insurer comes down to your personal situation. If you're uncertain about which option suits you, it may be worthwhile to speak with a financial adviser.

Is income protection insurance through superannuation tax-deductible?

According to the Australian Tax Office, only the premiums you pay to protect your income are deductible, and this is only if you’re eligible. As premiums for income protection insurance through superannuation are paid from concessional contributions, they’re therefore not personally tax deductible.

These premiums reduce your super balance while counting toward your concessional contribution cap, which has a limit so that you do not become subject to extra tax. While the super fund may manage the tax on the premiums internally, you cannot claim a deduction on your own tax return. 

Tips for reviewing your superannuation fund’s income protection insurance

Follow this simple checklist for setting up income protection through your super fund: 

• Check your waiting period to know how long you must be unable to work before payments begin.
• Confirm your benefit period to understand how long payments will continue if you can’t work.
• Compare the best income protection insurance policies inside superannuation Australia to see what best suits your exact needs. 
• Review your premium cost to ensure the deductions from your super are affordable.
• Look for offset clauses to see whether other payments might reduce your benefit.
• Check for exclusions to understand what conditions or situations are not covered.
• Note your last policy review and consider comparing TPD insurance vs income protection insurance in superannuation to make sure this cover still matches your current circumstances. 

Frequently asked questions

Can you claim income protection insurance through super on tax?

No, income protection insurance paid through your superannuation is not tax-deductible to you personally. While the super fund may manage the tax on the premiums internally, you cannot claim a deduction on your own tax return.

Do all super funds have income protection insurance?

No, not all super funds offer income protection insurance, and the type and level of cover can vary between funds.

Is income protection insurance through superannuation worth it?

Income protection insurance through superannuation is just one of many ways to secure this type of insurance cover. Ultimately, the benefits of claiming cover through your superannuation versus directly through your insurer depend on your specific circumstances. 

Do I have income protection insurance with my superannuation?

To find out whether you have income protection insurance through your superannuation, check directly with your super fund. Many super funds include income protection insurance automatically, but others require you to opt in. This can be done by logging into your super account, reading your annual super statement, or contacting your super fund directly.

What does income protection insurance cover?

Income protection insurance covers a portion of your income if you’re unable to work due to sickness or injury, helping you pay everyday expenses such as bills, mortgage or rent, and living costs while you recover.

What are the superannuation release conditions for an incapacity insurance claim?

The superannuation release conditions for an incapacity insurance claim depend on the release conditions of your superfund. Superannuation benefits can only be released when you meet a legal “condition of release,” which means being assessed as either temporarily unable to work (for income protection) or permanently unable to ever work again (for TPD).

Ultimately, whether you purchase income protection insurance through your superannuation 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.