Income protection is important but where is the policy best held – inside or outside superannuation? The answer depends on several factors such as the needs of each individual.
Note that in an income protection…
- Cover structures inside or outside super are with tax deductibility benefits.
- Inside or outside super, taxes are applied on marginal rates on benefits’ receipt; costs after tax are the same.
- Differences between inside or outside of super vary in importance and complexity.
- Policy inside super does not affect an insured’s daily cash flow.
- Income protection policy costs may be covered by 9% of an insured’s super guarantee contribution or accumulated balances.
- Some cover features inside super may be disadvantageous to some individual.
- Funds from super contributions are included in the concessional contribution cap, now at $25,000 a year; cover within super can eat away the cap.
Considerations regarding protection within super include:
- Trustee compliance with the Superannuation Industry Supervision Act (1993) requirements.
- Temporary incapacity benefits can only be granted after trustee fully meets requirements; outside super, the insured only needs to comply with the insurance contract terms.
- Benefits are limited to non-commutable income in replacement for the insured’s pre-incapacity income. Some ancillary benefits are not available through super fund.
- Risks of ancillary benefits denial are present in SMSF (self-managed super fund).
Certain issues occur before benefits of TPD (total and permanent disability) outside super and income protection inside super are granted.
- Paid benefits for TPD are only for permanent incapacity and only for temporary incapacity for income protection.
- Certain policy contract value may go higher than pre-disability income where the excess remains in super fund and could be an issue for clients with unsteady income. The 75 per cent rule (an income protection pre-incapacity income benefits limit) can help in such issues.
- Compensation from income protection policy together with ancillary benefits may not be fully 100% of pre-disability income; within super, release conditions may allow 100% payment but no more than that.
Purchase the right income protection insurance based on individual requirements.
- For those who can afford it or who prioritize their retirement savings through maximum amount contribution, the better choice is outside superannuation.
- For those with limited cash flow or who can go by without ancillary benefits, income protection through super is ideal.
Making an educated choice is not easy. This is why it is best to consult an expert where benefits and coverage type according to needs can be explained better. Things change even in insurance and what’s applicable today may not be appropriate after some years.