Income protection insurance provides you with a continuous monthly benefit in the event that you are unable to continue working due to an injury or illness. You can insure up to 75 per cent of your pretax income, and you will usually be allowed to hold this policy up to the age of 65. This benefit replaces your income in the period that you are unable to work, ensuring you can meet your financial obligations until you are able to resume work.
Income Protection Super
You can take out your income protection insurance through super. Tax deductible premiums are not available in this arrangement. Tax deductibility for your premiums only apply when you take out your income protection insurance outside the superannuation fund. Income protection through superannuation offers you only a limited cover and may not be tailored to your specific needs. This means that under certain circumstances, you may not be covered.
When making a claim for income protection from your super fund, the insurance provider has to be satisfied that your claim is legitimate. In addition, the trustee of your super fund has to approve your claim. If approved, the benefit is first paid to the trustee, and when you have met the condition of release, the benefit is paid out to you.
To claim the benefit, you also have to be temporarily incapacitated. This means you may be unable to make a claim if you are partially disabled.
Retirement And Income Protection
It is much cheaper when you take out your income protection insurance through super. Tax deductible premiums may not be a benefit, but the lower cost means you are able to make savings. However, you need to check how the premiums for your income protection will be paid. The super fund may sometimes pay for your premiums using your retirement funds. It is therefore important to confirm whether this is the case before taking out an income protection through a super fund.
When you take out an income protection policy through a super fund, the cost of the insurance will be lower. This is because a super fund uses a group policy and is therefore able to access wholesale rates. The policy is also cheaper because you will not be assessed on your individual risk factors and conditions. You therefore do not need to give your personal lifestyle details or take a medical exam to be accepted into the scheme, since it is a group policy and you will all pay the same rates.
It is important to consider whether you need a standalone income protection insurance policy that is separate from the one held by your superannuation fund or not. If you decide to take out a standalone policy, you may have to pay your premiums from your after-tax income, and the resultant tax you will be charged may be as high as 45 per cent. However, you will have a cover that is relevant to you and tailored for your needs, meaning you will stand to benefit at your time of need. Holding your policy under super would mean that you pay your premiums from your pretax income, with a tax of only 15 percent, but with very limited benefits.
Kerrie Peacock possesses long term experience working in the Australian personal insurance industry. She understands the varied needs of different policy holders and how to select the most suitable products. You can visit www.mecovered.com.au/income-protection-insurance-through-super-tax-deductible to help you select the best coverage.