Taking out income protection insurance ensures that you are covered in the event that you are unable to work for some time due to serious illness or injury. You have the option of purchasing your income protection insurance in superannuation funds or you could choose to purchase the cover outside of them. The decision on whether to have your cover inside or outside of a superannuation fund will be determined by your individual circumstances.
There are a few issues you need to consider before deciding whether or not to have your income protection insurance in a superannuation fund. Once you successfully make a claim, the benefit paid to you will be taxed at the marginal tax rate for both arrangements. You will also find that under both arrangements, the after tax cost remains the same for your income protection cover.
When your income protection is within super, the policy is cheaper than if it were outside super. This is because the super fund purchases income protection as a group policy and is therefore able to get wholesale prices. The competitive rates of acquiring income protection are transferred to the fund's members, hence enabling you to get income protection at competitive rates.
Normally, when you purchase income protection outside super, you have to take a medical exam and provide other personal and lifestyle details. These are then used to determine the level of cover you will be offered. Such details are not required when your income protection is within a super fund because it is a group policy, meaning your medical details and lifestyle will not impact the kind of policy you get since all the members get the same cover.
If you have an occupation that is considered high risk, having your income protection in super would be a good idea. This is because you will not be denied cover because of your occupation as there are no restrictions on occupation under super.
When you take out your income protection insurance in superannuation, your contributions to the super fund are used to pay for your insurance premiums. These contributions are taxed at a rate of 15 per cent. This is quite low compared to the tax rate of up to 45 per cent that you will be charged when you pay for your insurance premiums outside of super from your after tax income.
The good news about taking your income protection insurance in superannuation fund is that your income is not affected in any way. This is due to the fact that the premiums are paid for from your pretax income through your contributions to the super fund. This therefore means that your cash flow is not affected even as you maintain your insurance cover.
Having your income protection in super may limit the amount of coverage you can get, and the cover may also not cater very well for your individual circumstances as it is quite limited. When making a claim, you have to satisfy both the trustee of the fund and the insurance provider before accessing the benefits.
Kerrie Peacock assesses key developments within the personal insurance industry and reveals the pros and cons of life cover for Australian families. To know more about life cover for Australian families visit us at www.mecovered.com.au/income-protection-insurance-in-superannuation-funds.