If you are accustomed to a paycheck at the end of every month, then income protection insurance would be an ideal policy for you. This is because of the burden this policy will remove from your shoulders if you are unable to work due to illness or injury. What income protection insurance does is that it provides you with a regular income, usually up to 75 per cent of your usual income, until the time you are able to resume work.
Income Protection Through SMSF
You can decide to take out an income protection insurance policy through a self-managed super fund (SMSF). This option has a lot of similarities to if you were to take out an individual income protection policy. However, there are some differences between an individual income protection policy and income protection insurance in SMSF.
When you take out income protection insurance in SMSF, you can decide to buy the policy and pay for the premiums from the contributions your employer makes to the superannuation fund. This means you do not have to use your after tax income to fund this cover. In the event that you may need to make a claim, the SMSF will make the claim on your behalf, making it easier and more convenient for you since it is easier for an entity to claim for benefits than an individual.
When you have your income protection insurance in SMSF, the premiums are tax deductible because the benefit from this cover is considered an assessable income. You may not be required to undergo any medical examination when you purchase income protection insurance in SMSF.
When you have income protection insurance in SMSF, the funds that would have been channeled to your retirement fund are the same funds used to pay for the premiums. This means that your retirement fund is eaten into over time, so that by the time you retire, the amount remaining as your retirement package may not suffice for your needs.
The income protection policy options available in SMSF are also quite limited. You may therefore end up with a cover that does not quite address your income protection needs. The benefits which come with income protection insurance in SMSF are also quite few, and you have to satisfy the conditions of the SMSF before any benefits are released to you.
Under SMSF, the amount of cover you have will be normally be reduced with each passing year, and this may pose a risk for you since by the time you make a claim, your level of cover may not be sufficient. Most SMSFs may also not have flexible waiting and benefit periods.
Deciding on whether to have your income protection insurance in SMSF or outside super will depend on your individual circumstances. This option is favorable if you are on a tight budget, or if you are starting a new venture and do not have much money left over to put into insurance premiums. Having your insurance policy outside super may be ideal if you have enough money to pay for your premiums without straining financially.
Kerrie Peacock evaluates the variety of options available for TPD insurance in superannuation and provides useful information to fulfill the unique needs faced by policy holders. For more information and tips on what can work for you, visit www.mecovered.com.au/income-protection-insurance-in-smsf.