Income protection insurance through superannuation vs direct

Imagine waking up one day unable to work due to being too sick or injured — how would you pay your bills, keep up with rent or mortgage payments, or support your family? That’s where income protection insurance could step in as your financial safety net. By replacing a portion of your income, income protection insurance can help you maintain your lifestyle while you focus on your recovery. 

But the big question is: should you arrange this cover through your superannuation or directly with an insurer? Let’s dive into the key differences to help you find the option that works best for you.

What is income protection insurance?

Income protection insurance provides monthly payments to replace a percentage (usually up to 70%) of your pre-tax income if you're unable to work due to sickness or injury. Policies often cover various situations, including physical injuries, illnesses, and mental health events, depending on the terms of your policy.

This type of insurance is designed to ease financial pressure if you’re sick or injured and can’t work, so you can focus on recovery. Policies can differ in terms of waiting periods, benefit periods, and cover, so it’s essential to find one that suits your needs.

Now, let’s compare the two main ways to secure income protection insurance: through your superannuation or directly with an insurer.

Comparing your income protection insurance policy options

When deciding between super-based or direct income protection insurance, it’s important to understand each policy’s unique features.

• Superannuation-based income protection insurance offers convenience, potentially lower premiums due to group policy pricing, and automatic cover adjustments through employer-sponsored plans.
• Direct income protection insurance provides more control, customisation options, and potentially tax-deductible premiums.

Ultimately, you should consider your own personal circumstances, as financial goals, lifestyle, and employment stability all play a role in determining the best choice.

Income protection insurance with an insurer of your choice

Arranging income protection insurance directly with an insurer may give you greater control over your policy. Here’s information about securing a standalone income protection insurance policy directly with an insurer. 

Control

A direct policy allows you to select your insurer, benefit amount, and other features to match your circumstances. However, you’ll need to keep track of changes in your income to update your cover manually.

Customisation

Direct policies may let you adjust key elements, such as:

• Waiting period: The time you need to wait before benefit payments start.
• Benefit period: How long you’ll receive payments while you’re unable to work.

These options allow you to tailor the policy to your needs and budget.

Tax deductibility

Premiums for income protection insurance are generally tax-deductible, offering additional financial benefits. Check with a financial adviser or accountant to confirm if this applies to your situation.

Additional features

Policies can often include extras, such as rehabilitation benefits to support your return to work, final expenses cover for funeral costs, and recurrent disability benefits, which can ensure continued cover for certain recurring conditions without a new waiting period.

Income protection insurance through superannuation

Income protection via your super fund can be a simpler and more affordable option for some. Here are the key considerations for income protection insurance through super.

Cost

Superannuation-based income protection insurance can often be cheaper due to group pricing. However, these savings may mean less flexibility and fewer policy options.

Pre-tax super contributions

Premiums are automatically deducted from your super contributions, reducing your immediate out-of-pocket expenses. However, this can impact your retirement savings over time without additional personal super contributions. 

Convenience

Income protection insurance through superannuation policies may be easier to manage. However, cover levels may not automatically adjust with changes in your income, so it's important to regularly review your policy to ensure it meets your needs.

Claims

Claims for super-based income protection insurance are managed by your superannuation fund. While this adds convenience, it also means you must meet specific conditions of release, which can lead to longer processing times compared to direct claims.

The choice is yours

Deciding whether to secure income protection insurance through your superannuation fund or directly from an insurer of your choice depends on your personal situation and needs. Speak with a financial adviser and consider your family's needs when choosing your level of cover.

Income protection insurance could help protect you financially in the future. Find out more about the benefits of Real Income Protection Insurance. 

Claiming income protection insurance through superannuation

When claiming income protection insurance through super, your fund will assess whether you meet the eligibility criteria for a ‘condition of release.’ Here’s what to expect:

• Role of the superannuation fund manager: Your super fund oversees the claim process, assessing whether you meet the conditions of release.
• Conditions of release: You’ll need to show that your illness or injury prevents you from working.
• Timeframes: Superannuation claims can take longer to process than direct claims.
• Ease of management: While the fund manages the process, it may not offer as much flexibility as direct policies.

What to consider when weighing up your income protection insurance options

Choosing between superannuation-based and direct income protection insurance policies require careful consideration of your financial situation and lifestyle needs. Here are five key factors to consider when comparing your options.

Budget

Superannuation-based policies are often cheaper but may reduce your retirement savings. Direct policies, while sometimes more expensive, allow for tax-deductible premiums that can help offset costs.

Customisation needs

Superannuation policies typically offer standardised cover, while direct policies allow you to adjust features like waiting and benefit periods to suit your needs.

Tax implications

Premiums paid through superannuation are typically not tax-deductible for individuals. However, direct policy premiums may provide potential tax savings. You can also compare your personal super contribution tax rate with potential savings associated with income tax deductible premiums of a standalone cover. Contact a financial adviser or accountant for personal advice. 

Claim process

Superannuation fund claims require individuals to meet conditions of release and can take longer to process. Direct claims may be simpler and faster to process.

Long-term impact

Unless offset by personal super contributions, paying premiums from your superannuation balance can reduce your retirement savings. Standalone policies don’t directly affect your super balance, potentially helping you preserve those funds for your retirement.

Keep Reading: Find out everything you need to know about a Sole Trader’s guide to income protection.

Frequently asked questions: income protection insurance

How much is income protection insurance?

The cost of income protection insurance varies depending on factors like age, occupation, and cover amount. Super-based policies are often cheaper due to group pricing, while direct policies may cost more but provide more options.

Is income protection insurance worth it?

Depending on your personal financial situation, income protection insurance can be highly valuable, offering financial protection during periods if you get sick or injured and can’t work. It can provide peace of mind and allow you to focus on recovery rather than how you would pay the bills.

Is income protection insurance tax-deductible in super?

Premiums for super-based income protection insurance are typically not tax-deductible to individuals, as they’re covered by pre-tax contributions. In contrast, direct policies generally allow for tax-deductible premiums. Check with a financial adviser to confirm if this applies to your situation.

Protecting your income can mean protecting your future. Whether you opt for the convenience of super-based cover or the flexibility of a direct policy, income protection insurance can help getting you ready for life’s unexpected challenges. Explore Real Income Protection Insurance and request a quote now to secure the peace of mind you deserve.