Not so Super - Income Protection

In its 2014 report ASIC (the Australian industry regulator) was critical of insurance cover inside superannuation. While initially intended to provide basic Death and Total disability benefits for superannuation fund members, its more recent growth has been driven by cash-flow considerations and marketing. Today, cover inside superannuation (including industry and group insurance) is not necessarily ‘cheaper’.

Benefits payable from a superannuation fund must meet Superannuation (SIS) legislation requirements. This has given rise to a range of issues, particularly in relation to income protection. A number of traditional Income Protection benefits don’t meet the Superannuation conditions of release. Depending on the circumstances, these restrictions can have significant negative implications on the benefits payable.

Following are some examples of this:

1. If unemployed at the time of disability, you may not qualify for a benefit. This is because SIS requires that you ceased work due to disability. This anomaly doesn’t exist outside super.

2. Super fund payments can’t result in more than 100% of pre disability income. Therefore other entitlements such as sick leave and other income reduce the insured income protection benefit.

3. The definition of pre-disability income within super is usually the previous 12 months (from disability). Reduced working hours just prior to disability can significantly reduce the benefit payable. A comprehensive policy outside super will look back up to 3 years prior to policy commencement and take the best 12 months.

4. The insured amount via superannuation funds is usually not guaranteed.

5. The policy is most often cancellable at the insurer’s discretion following a claim, unlike outside super where the policy is usually guaranteed renewable.

6. You cannot receive both an income and lump sum TPD benefit from within super. Income benefit stops when lump sum TPD is payable. This can result in a significant difference to the amount paid outside super where no such restriction exists on policies.

7. The definition of Total Disability inside super is often very onerous requiring the person to be totally disabled throughout the waiting period.

8. There may be issues where a UK benefit is transferred and subsequently used to buy insurance. This is not supposed to occur but may not be regulated.

9. Making a superannuation contribution to preserve your retirement savings results in contributions tax; this can be 30% for higher income earners.

Given these issues, there may be no certainty of income protections benefits from within superannuation funds. Many of these issues would only ever become apparent at claim time. To avoid these issues, the alternatives are:

1. Have your Income Protection cover outside superannuation,

2. Split your cover both inside and outside super. Doing so allows issues which conflict with SIS legislation to be paid outside super and therefore maximise benefits at time of claim.

This information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice.