Most people are optimistic and believe that they will be able to earn an income throughout their lives, most certainly up until retirement age. However, we live in a world of uncertainty, and something unexpected can happen at any time. For example, ask yourself how you would cope if the unthinkable occurred and you could not work for a while.
Would the interruption of your ability to earn put yourself and your loved ones at risk? If you could not make an income for a period, would you be able to eat, pay your debt and expenses, and keep up your present quality of life? If the answer is no, it may be the right time to investigate income protection insurance.
Most Australian workers and employees have some level of income protection through a separate income protection insurance policy or as part of their superannuation fund. Income protection can be an enormous help in time of need.
This need can include becoming ill or sustaining an injury at any time in your life. In the process, the chances are that you will be unable to work temporarily. As part of your super, income protection will provide monthly payments to support you while you cannot earn your regular salary.
Income protection is one type of life cover that insurance companies offer you as part of your super fund. Some insurers also refer to it as salary continuance cover. However, it is essential to understand that the income protection it offers is not unlimited. If you become ill or are injured, the fund will only pay you a regular income for a specified period. This payment arrangement varies from fund to fund and between insurers.
For example, payment periods can be two or five years or may pay out only until a certain age. It is also essential to understand that income protection as part of your super will not pay your entire salary but will only pay you up to 75% of your current monthly earnings or income. Everyone can agree that this percentage is better than not receiving any financial assistance.
In some cases, a super fund will provide income protection automatically. However, this is not by default. For example, your superannuation fund attracts automatic death and total and permanent disability insurance cover. However, income protection is not always automatically included when joining a super fund. Instead, you may need to apply separately for income protection cover in your fund membership.
Most superannuation funds offer some level of income protection as an optional extra to their members, so it may be in your best interest to check with your fund to see if they have this option available. An easy way to do this would be to look at a recent superannuation statement. If you have any doubts, then follow up with your fund provider, who will be able to assist you and answer your questions.
WHAT IS A SUPERANNUATION FUND ANYWAY?
To understand income protection within a superannuation fund, you should first understand what a super fund entails.
In simple terms, a super is a way of saving for retirement. The primary purpose of superannuation is to generate an income for your retirement years. The point of a super is that it allows for substitution or supplementation for your pension, but it is not the same as the Government Age Pension.
It works well because your employer pays a percentage of your earnings into your super account. The employer makes this payment over and above your salary and wages. Fortunately, this arrangement also does not detract from your take-home pay.
You can choose the super fund you want within 28 days of employment. This fund will be the one to which your employer makes contributions. If you don’t select a specific fund, your employer will automatically pay contributions into a super fund they nominate or a ‘default fund’.
Whether you find employment as a casual worker, work part-time, or put in full-time hours, it doesn’t matter. A super still applies to you because your employer will make their contribution on your behalf.
If you are a temporary resident in Australia and earn a wage, you can still use and reap superannuation benefits. If you are a contractor paid primarily for labour, there is a good chance you will also be eligible for super. However, enquiries beforehand to gain clarity are always a good idea.
So, in a nutshell, when people talk about their super, it is essentially the money put aside by their employer during their working years so they will have funds to live on when they retire. This employer-paying insurance strategy on your behalf is otherwise known as the ‘super guarantee.’
It is an excellent plan to have a super fund as it helps you save money for your later years. The more savings you have in your super, the more money you will have for your retirement. Moreover, you can add to your super by making your own contributions to the fund to increase your retirement nest egg.
It is important to note that in many instances, you can only withdraw from your super when you retire (no matter which age that is, even in the case of early retirement) or when you turn 65 years old. However, you can make earlier withdrawals from your super fund under specific guidelines and if you legitimately need some of your preserved funds sooner.
Check with your fund provider about whether you will be able to access your money before applying. Fortunately, many super fund providers will make allowances if you are in a dire financial situation or develop a severe medical condition.
KEY POINTS TO TAKE AWAY:
- Suppose you are an employee in Australia and meet the requirements for superannuation. In that case, your employer must currently pay at least 10% of your salary or wages into a super fund.
- Employer super contributions do not form part of but are made on top of your annual salary and are known as the Super Guarantee.
- Every worker or employee gets paid super whether you work casually, part-time, full-time, as a contractor, and even if you are a temporary resident.
- You must receive a superannuation standard choice form within 28 days of starting work with a new employer. You can then complete this form and return it to the employer, indicating which super you choose so the employer can pay the super guarantee into your selected fund.
- If you are 18 years old or older and receive a gross minimum salary of $450 a month, your employer must pay super on your behalf. The same applies to those under 18 years old, being paid the same amount and working more than 30 hours per week.
- You can add your own money into your super savings to have more for your retirement.
- Superannuation is not a Government Age Pension fund but is a valuable complement to your government pension. Many people will tell you it is necessary to ensure a comfortable, worry-free retirement.
WHAT IS THE DIFFERENCE BETWEEN A GOVERNMENT AGE PENSION AND A SUPER FUND?
When Australians speak about their pension, they often refer to their Government Age Pension and their super. However, a super pension is different from the Government Age Pension in that it is a tax-effective income stream drawn from the savings you accumulate in your super fund.
Often, Australians use their super as the primary source of retirement income for retirees. However, it is good to be aware that around 62% of Australians over the age of 65 also qualify for some level of Government Age Pension payment. If you are eligible for the Age Pension, the amounts you receive can provide you with additional resources on top of super to support your retirement.
Essentially, the Government Age Pension in Australia is a means-tested social security benefit. The government provides money to people over the relevant pension age to help them cover their living expenses for the rest of their lives.
There are many contributing factors to receiving a Government Age Pension. However, it is still possible that you can draw on a full or partial government Age Pension at the same time as taking an income from your super pension. At the same time, many people may also qualify for additional government benefits such as a Seniors Health Card and Pensioner Concession Card.
The super is a type of investment or savings in which an individual’s employer must contribute 10% of the employees’ earnings over their working lives. The individual can also personally contribute and then access funds when they stop working. It is a much larger monetary amount than the pension rate in general terms.
Another perk to having superannuation is that your super remains in the investment option of your choice, meaning that your savings are still generating returns for years to come.
There are two ways to work with your super at preservation or retirement age:
- Open an account-based pension to help you manage your super savings and keep them invested for growth.
- You can withdraw funds from your super in a lump sum.
THE DIFFERENCE BETWEEN STANDALONE INCOME PROTECTION AND SUPER INCOME PROTECTION
If you are considering income protection insurance, it can be confusing. The process and legal jargon are quite the minefield for clients to navigate alone. Therefore, it will always be our advice that you seek the guidance and counsel of an insurance broker.
Our insurers and brokers at WealthSmart are well equipped to give you all the information you need to choose what suits you the best. In addition, we will help you understand the advantages and disadvantages of owning an insurance policy that protects your income and the usefulness of regularly reviewing your insurance needs.
To make things easier for you to understand, we have broken down the differences between a standalone income protection policy and one under your superannuation.
Simply speaking, you can either take out a policy with your super fund or purchase one directly from an insurance provider. We recognise that your situation, circumstances, and needs may change over time, but we have outlined the basics in a user-friendly way to give you a starting point.
Everyone’s needs differ, and most people’s aspirations in life also vary greatly. Therefore, making the right choice when purchasing income protection insurance will deviate for each person. One major factor influencing your decision-making is cash flow and what you can or want to invest in income protection.
If you have a steady, stable flow of income that allows you to live comfortably, then income protection outside superannuation may be a good option. This alternative means you can afford to take additional finances to invest in a standalone policy outside of your existing super.
However, if you are not earning a regular or steady income and experience uncertain cash flows, income protection within your existing superannuation will undoubtedly be better. It may be worthwhile to you in that you would not need to reach outside your super to pay for an additional policy. This choice might be the best route if you own a small business in its fledgling days or are just starting out in life.
A few aspects of income protection stay the same whether you purchase a policy in or out of your super. These features are the same on each option:
- Premiums are generally tax-deductible under both of these distinct ownership arrangements
- The after-tax premium cost is the same for the client under both formats.
- After making a claim, monthly benefit payments are taxed at the client’s marginal tax rate under both structures as payments are considered ‘ordinary income’.
Here are several aspects of how standalone and superannuation protection income differ:
- You must purchase the standalone income protection insurance policy directly through an insurance broker. In contrast, protection is added on to or, in some cases, automatically added when you take out a super.
- With a standalone income protection insurance policy, you will need to apply online or over the phone when the insurance advisor can ask questions about your health and medical history before processing your application. With super income protection, you will be guaranteed acceptance within their guidelines.
- A standalone income protection insurance policy will pay you up to 85% of your monthly income should you not work for a period. In contrast, superannuation income protection will pay 10% less, at 75% of your monthly earnings.
SUPERANNUATION INCOME PROTECTION:
A positive aspect of super income protection is that several super funds offer members the option of taking out different types of insurance. The fund manager will regularly deduct premiums for these policies from your super account balance. Consequently, you don’t have to make any additional contributions yourself, making it cheaper and more manageable.
Most of the time, fund managers or insurers will add or include certain insurance types on a default basis. For example, this action may consist of life insurance and total and permanent disability insurance (TPD). Likewise, income protection insurance is mostly an add on, but, in some cases, the company may include it automatically.
So, in a nutshell, super funds could offer these types of insurance products by default or on an opt-in (you choose) basis. But, of course, this can vary from fund to fund, as insurers consider issues like the members’ circumstances, age and occupation.
Here are some of the main advantages and disadvantages when it comes to having a personally owned income protection policy:
- You can manage the cash flow and premium affordability more efficiently as income protection with superannuation can be funded in several ways. The fact that you and your employer can make contributions and utilise funds from the existing superannuation fund balance makes it more affordable in the long run.
- You can benefit from income tax savings by claiming a tax deduction for personal contributions. In addition, you could experience possible savings on your premium by contributing to your gross salary amount.
- If you have cover in an insurance only superannuation, you might be able to get a 15% premium rebate on rollovers made to the fund towards your premiums. This method works because the fund trustee’s tax concession from tax deduction claims on premiums will be passed back to you as a member.
- Premiums may be cheaper in superannuation than outside superannuation. However, it may be the same or be similar to structuring income protection with a linked policy. So, keeping this in mind, get your cost versus benefits and terms and conditions assessed first before deciding between standalone or super income protection.
- The superannuation fund’s trustee will generally withhold pay-as-you-go tax on benefit payments before paying the client’s monthly benefit.
- You will need to meet the insurance policy definition of incapacity before payments are considered. In addition, the insurer will require you to complete the temporary incapacity condition of release under superannuation law. They need you to meet this condition before the fund even considers paying out the income protection benefit to the client. So, you could have a gap in income while fund managers resolve the legalities.
- Even more payment delays are possible as benefits must generally be paid from the insurer to the fund’s trustee before the payment gets to you.
- Premiums can chip away at your retirement savings over time if you do not make extra contributions to compensate for what is withdrawn from your savings for premium payments.
- Any contributions made to fund premiums count towards the contribution caps.
- Many fund providers have stringent and restrictive indemnity policies where the benefit amount is limited to what you earned one to two years before injury or inability to work.
- Unfortunately, insurers cannot provide benefits for critical illnesses through superannuation as most of these are limited to the client’s income before incapacity.
- If you change super funds or your super account becomes inactive, your cover may end, leaving you with no income protection if you become ill or injured and cannot work.
- You might end up without the amount of cover you need as some super funds only offer coverage for up to two years. In contrast, the insurer provides you with cover until 65 with some standalone policies.
STANDALONE INCOME PROTECTION OUTSIDE OF SUPERANNUATION:
A standalone income protection insurance is personal insurance you can take out directly from an insurer, not through your super.
This type of income protection will provide financial support if you are temporarily unable to work. Further, this income interruption could be a partial or complete disability following an illness or injury.
You can expect to receive financial aid from your insurer that they measure according to your income. The amount you are likely to receive is typically a set percentage of your income and will be paid out to you regularly.
These instalments will continue until you can return to work, or in the case of never being able to work again, and they will continue until you reach a certain age. Sometimes there can also be a specified allocation period underwritten into your policy so that payments will last
until the end of this set timeframe.
If you already have some income protection like Workers’ Compensation, this position may reduce your income protection payout. Furthermore, you may need to wait 14 days to two years between making a claim and receiving benefits under your income protection policy.
On the upside, owning income protection outside of superannuation can provide you with more product features and flexibility than owning insurance within the parameters of your super.
Below you can view some of the main advantages and disadvantages when it comes to having a personally owned income protection policy:
- Your premiums will generally be tax deductible as you are the policy owner and the insured party.
- A standalone income protection policy can provide protection even if you are not employed if an event happens to make you temporarily incapable of working.
- Standalone income protection policies can be tailored to your requirements and be for your business dealings. For example, you would be able to cover business expenses if you become incapacitated.
- Unlike superannuation income protection, policies are more comprehensive. They will often include caregiver costs and trauma, rehabilitation, and relocation related coverage.
- You can selectively request cover increases to keep up with inflation. This decision will ensure that you can stay abreast of the current cost of living expenses if you need payment at any time.
- It is possible that with a standalone income protection policy, you could request a lump-sum benefit as opposed to ongoing payments.
- If the income protection policy provides benefits of an income and capital nature, only that part of the premium attributed to the income benefit is deductible.
- If you smoke cigarettes or engage in similar lifestyle practices, this will be factored into your application and might negatively impact the cost of your premiums. In addition, pre-existing medical conditions can also affect your premium. These conditions contrast with superannuation insurance, where you enjoy automatic acceptance.
- You will pay your premiums from your net income. However, this arrangement will mean that it can become too expensive and not be a sustainable income protection option in the long run.
- You must declare the entire amount you receive as a benefit as pay-as-you-go tax is generally not withheld from benefit payments.
HOW DO INCOME PROTECTION AND WORKERS’ COMPENSATION DIFFER?
It is easy to become overwhelmed when trying to decipher the available options regarding income protection. Where do you even start? With so many different alternatives for cover, it is only natural to ask yourself what path you should take for yourself and your family.
You may have already realised that there is a considerable risk to you and yours if something happens and you cannot work. Even a few months of work interruption can put you seriously out of pocket. This dire situation is scary, so the need to cover yourself for a possible loss in income becomes paramount.
But what do you choose? Is income protection insurance or workers’ compensation better for you, or should you have both?
If you have been around for a few decades and have been in the workforce for some time, you will probably have heard of both workers’ compensation and income protection insurance. You also probably believe that you can use one or both to supplement lost earnings. However, do you know enough about how these instruments share similarities and differences to decide which will benefit you the most?
Below is a short guide to help you understand the critical factors of both income protection insurance and workers’ compensation:
Similarities – Income protection insurance and workers’ compensation provide you with an income should an illness or injury force you to stop working.
Differences – Workers’ compensation covers you for injuries or illnesses in the workplace, ensuring that you will receive a payout to reimburse you for loss of earnings due to work interruptions. Income protection insurance aims to secure regular payments if you cannot work due to a non-work-related illness or injury, covering incidents inside and outside the workplace.
WORKERS’ COMPENSATION (EXPANDED)
Workers’ compensation is usually part of your employment package and is a mandatory form of insurance that employers across Australia must take out. As an employee, you do not have to pay the cost of the cover. The policy is specifically designed to protect you as the employee if you get hurt, sustain an injury, or become ill due to circumstances related to your work environment.
In simple terms, you can expect workers’ compensation to cover four areas. It is also always wise to examine the facts of what workers’ compensation level you are eligible for when starting a new job or role. You should include this information in your new contract with the employer. Several different types of insurance can be categorised as workers’ compensation:
- Benefits for lost income
- Total permanent disability insurance
- Lump-sum payments
- Medical expenses
- Life insurance in case of death
KEY POINTS TO REMEMBER FOR WORKERS’ COMPENSATION:
- The terms of workers’ compensation typically involve a maximum length of about 130 weeks. The benefit period for workers’ compensation generally is somewhere between nine weeks and 13 months. This timeframe may differ slightly, so be sure to confer with your employer if you are in doubt.
- Because workers’ compensation is an employer-based arrangement, it usually will not apply to self-employed individuals or sole traders. You cannot take out workers’ compensation on your own. In this case, an income protection insurance policy will be an excellent safeguard to secure an income if you cannot work for a period.
- When it comes to workers’ compensation, the insurer will only provide cover if the accident or illness directly results from the job or work environment.
- Workers’ compensation can compensate for up to 90% of your usual salary to protect you and your family while you recover.
- You can use insurance payments to pay for medical expenses or rehabilitation costs if you lose your income because you’re unfit to work.
- Before receiving any worker’s compensation payments, the relevant parties must determine precisely where and why the injury or illness occurred. For example, suppose the experts cannot prove that injury and disease resulted from jobs undertaken at work or from the immediate risks in the work environment. In that case, you will unfortunately not be eligible for compensation.
INCOME PROTECTION INSURANCE (EXPANDED)
There are several reasons you might consider purchasing income protection. First, income protection is far more comprehensive insurance than workers’ compensation. It pays you 75% of your income, and it is convenient because you don’t have to prove where your injury or illness originated, unlike workers’ compensation.
The only requirement with an income protection policy is that you will need to prove that you are, in fact, unable to work. In addition, receiving compensation for the injury or illness is not dependent on its origins being in the work environment.
Income protection insurance differs from workers’ compensation because it is something that you, as the individual, not your employer, must invest in yourself. It will cover you for lost income due to injury or illness anywhere and anytime.
Another perk of having an income protection policy versus only worker’s compensation is choosing to purchase income protection and other life insurance policies. Additional life insurance policies can add extra coverage for critical illness or total permanent disability, providing greater security if the unexpected happens.
Unlike workers’ compensation which pays benefits in various ways, income protection is a purer form of income replacement insurance. However, there are some intricacies that you should know about, so working closely with an insurance broker will serve you well.
KEY POINTS TO REMEMBER FOR INCOME PROTECTION INSURANCE:
- The amount that the insurance company pays out will vary depending on the severity of your injury or illness. Think about it this way: the more minor or more extensive or severe an injury or disease will help determine how much the insurer pays you. So, for example, a comparatively minor wound will not warrant the same payout as the loss of a limb.
- Each type of policy you take out for income protection may vary considerably regarding the benefit period, waiting period and benefit amount.
- The benefit period is the maximum length of time you will receive monthly payments while incapacitated and unable to work. This benefit period could be two years, five years, or through to age 65. Of course, keep in mind that the longer the benefit period, the more you will pay on your premium.
- The waiting period is the length of time you must be unable to work before you can claim. This period means you must already be off work due to injury or illness to make your claim. This requirement will vary from insurer to insurer, but standard waiting periods include 14 days, 30 days, and 60 days. You can opt for a more extended waiting period if you want a lower premium, thereby paying less for your policy.
- The benefit amount is how much you will receive monthly from the insurer while you cannot work, or in some cases, as a lump sum. This payment will generally encapsulate 75% of your income in its entirety. You will need to provide your insurance broker with evidence of your total earnings as part of the underwriting process. They may want to look at your tax returns, payslips or bank statements.
- Income protection is something you choose to take out and pay for yourself. You can also purchase this protection through your superannuation fund, and the cost will come from your super savings. Income protection insurance policies are not mandatory at a government level compared to workers’ compensation, which is compulsory for all companies with employees. However, many building contractors have particular requirements, which differ between states.
- To be eligible for particular employment or work contracts, you might need to be an income protection insurance policyholder, especially in the construction or building industries. These industry employers often require all subcontractors and self-employed tradespeople on working sites to have their income protection insurance. Therefore, you might need to show them evidence of your insurance by providing them with a certificate from your insurer as proof of your status.
CAN YOU CLAIM WORKERS’ COMPENSATION AND INCOME PROTECTION AT THE SAME TIME?
Yes, you can, but your insurance policy will likely offset your workers’ compensation payments. This offsetting means that you might receive less remuneration from your insurer because you already have financial insurance through your employer as part of workers’ compensation. This reduced payment strategy often happens so that you do not earn more or receive a payout worth more than 100% of your salary before you became disabled or injured.
However, some insurers will refund you some previously paid premiums if your benefit payment is less because of workers’ compensation payments.
Another aspect to consider if you become injured or ill at work is how much workers’ compensation will pay you and for how long you will receive payments. Even if you are eligible for workers’ compensation, it might still be worthwhile to have an income protection policy. It often comes with more extended benefit periods and inclusions like specified injury benefits and flexible disability definitions.
SHOULD YOU STILL CONSIDER INCOME PROTECTION IF YOU HAVE WORKERS’ COMPENSATION?
When considering whether it is worth it to purchase income protection insurance when you already have workers’ compensation, it is vital to know one crucial fact:
- According to statistical data generated by the Australian Bureau in 2017-2018, approximately 47% of Australians who suffered injury or illness due to or in their job and work environment did not receive financial assistance.
While it is challenging to decide precisely why the above is true, statistics reveal that many individuals did not apply for workers’ compensation because:
- They did not believe they were eligible
- They were not aware of workers’ compensation
Some people did apply out of the above percentage but did not receive compensation anyway.
What you can take away from this is that it is good to be informed, but also realise that workers’ compensation is not always a straightforward operation. It is, of course, in your best interest to have workers’ compensation, which is mandatory under Australian law anyway.
However, it is a fallible system and, in many cases, does not cover everything you may need. For example, the compensation you may receive is limited to workplace injuries and disease. So, if you were prevented from working due to injury while on holiday or just in everyday life, you would not receive any financial assistance nor be granted time off work.
As you can see from the above information, it would make sense to be covered for income loss with more than workers’ compensation. Therefore, being a holder of an income insurance policy will clearly be in your best interest!
KEY POINTS AS TO WHY INCOME INSURANCE IS BENEFICIAL IN ADDITION TO WORKERS’ COMPENSATION:
Statistical data from The Australian Institute of Health and Welfare reports that Australians are not as healthy as you might think. Every day, Australian citizens experience ill health or injury that prevents them from working. Some illnesses and injuries are workplace-related; however, most occur outside the job arena. Poor health in most Australian people is frequently due to these environmental influences:
- Access to nutritious food
- Houses in which people live
- Direct contact with nature elements (trees, plants, pollen, etc.)
- Spaces for social interaction
- Air, water, and weather conditions
Data reveals that approximately 100 Australians suffer from strokes every day, never mind other medical ailments, leaving them permanently out of work. Data also conveys that accidental falls were the most common cause of injuries and deaths for Australians. We can control some elements of health by pursuing healthy lifestyles and making wise choices that do not incur unnecessary risks. However, we cannot protect ourselves from unforeseen circumstances that may arise, and no matter what precautions we take, we are not in control of absolutely everything that can happen.
This is where income protection insurance within or outside your super fund will be valuable and why you need additional cover other than workers’ compensation. Below are key points to help you gain perspective.
- Income protection offers peace of mind so that you and your family can enjoy protection should your income be affected by injury or illness anywhere and anytime.
- While workers’ compensation may already cover you to some degree, supplementing this with income protection insurance can provide more excellent benefits and security. It also covers income lost due to accidents and illnesses sustained outside of work.
- Income protection policies are often more flexible and can accommodate several medical issues, including elective surgeries that may prevent you from working for a specific period.
- If you rely solely on Workers’ Compensation, you will not be covered if the injury or illness is not due to your job or workplace.
- In contrast to an income insurance policy, workers’ compensation legality requires you to present evidence to prove the injury or illness occurred as a direct result of your job or in direct relation to your work environment.
- As workers’ compensation is more stringent in its terms and conditions, as opposed to a separate income protection policy, the procedure could result in lengthy delays leaving you without financial assistance longer than you can afford.
- If you work for yourself, are an independent contractor, or are a sole trader, workers’ compensation may not cover your needs. Therefore, an income protection insurance policy will be your best option.
- Although personally paid premiums are associated with income protection insurance, these are generally tax-deductible. You can also regulate the amount you spend on premiums. For example, you can opt to pay less by adjusting the level of cover you require to suit your needs.
IF I DO NOT EARN A LOT OF MONEY, IS INCOME PROTECTION THROUGH MY SUPERANNUATION FUND RIGHT FOR ME?
Super income protection is suitable for everyone. Regardless of your stage in life, income protection can be beneficial. But unfortunately, there are many preconceived notions and unfounded beliefs surrounding income protection.
A couple of such beliefs and misconceptions are:
- That income protection is only worth it for those who are big earners and therefore have a lot more to lose financially if, for whatever reason, they can no longer work and bring in an income.
- That income protection insurance will be too expensive and take more from you than it will offer you in return.
As you are not earning much, it probably is not worth even thinking about, right. Not necessarily.
Look at it this way:
- Whatever your income currently is, what would happen if you lost it for a period due to illness or injury?
- What you are earning right now is what is supporting your current lifestyle.
- Even if you are earning comparatively less, if it was not there anymore, chances are you would not be able to pay for your everyday expenses.
Anyone who is part of the workforce will benefit from the protection and peace of mind provided by income protection insurance, no matter what you earn or your current life stage.
Although it is not a pleasant thing to ponder, imagine or consider the chain of events that could transpire if the monthly money you earn was no longer deposited into your account by your employer. The years you work over a lifetime are lengthy, stretching far into the future. It would be almost impossible to go through your entire working life without sickness or injury. It helps to think about income protection as a superhero on standby, hovering in the wings of your life just waiting to save the day if you get sick or injured.
If you are a family person, there is certainly the consistent and sometimes overwhelming pressure of providing for children. This tension can come in the form of expenses for the food and clothing they need. If both parents are working, childcare is a considerable expense, together with schooling and educational costs. Interruption of your ability to earn could be extremely detrimental.
As for all singles or couples without kids, you will still need an income replacement for day-to-day expenses and financial commitments if you cannot work. Whether you are single, a couple with or without children, there are still high monthly costs like rent or mortgage repayments to consider. As for the self-employed or small-business owner, your monthly income can fluctuate and often be inconsistent.
So yes, income protection insurance is for everyone. Taking out income protection within your super fund is the most beneficial route for small earners as it does not require an extra contribution from your bottom line. The positive thing is that you have more control and flexibility with the additional option of eventually starting to make personal contributions at a later stage should you begin to earn a higher income. In addition, this approach will have the benefit of boosting your savings. However, this is not a requirement.
Unlike an external income protection policy, your premium comes out of your existing super. Another benefit is that your premium might also be comparatively cheaper. Unlike a policy outside of superannuation, super funds buy income protection policies in bulk, making the premiums less than standalone policies.
Having income protection within your super is also highly convenient and one less thing to worry about in an already stressful, busy life. The explanation behind this is that there is usually less paperwork as premiums are automatically deducted from your super balance, not your bank account. The financial perk is that you do not need to worry about having enough money in your account after living expenses whittle away your salary.
IS INCOME PROTECTION IN YOUR SUPERFUND TAX DEDUCTIBLE?
Yes and no.
That answer can sound conflicting, but here is a short explanation:
Income protection held inside a superannuation fund is tax-deductible by the fund itself, not to you personally. So, unfortunately, you will not reap the benefits because you won’t receive this tax deduction. In addition to this, you will have to pay tax on the income protection benefit or payouts you receive from your superannuation. This process happens in the same way as payments and benefits from income protection policies (standalone policies) outside your super.
You cannot claim a tax deduction if the fund manager deducts your premium from your super contributions. Also, in the case of income protection through superannuation, you receive compensation for things like physical injuries directly, making personal tax deduction a moot point.
However, if you have income protection outside your super fund, the premiums are generally tax-deductible. This happens because you do not receive direct compensation for the actual injury or illness with a standalone income insurance policy. Instead, you qualify for payment for the loss of income. So basically, within a super, the actual injury is insured, whereas your income is insured with a standalone.
IS INCOME PROTECTION WITHIN SUPERANNUATION LESS COMPREHENSIVE THAN A STANDALONE POLICY?
Income protection within your super is slightly different from protection outside your super. Both have advantages and disadvantages, but because income protection within a super fund needs to meet the superannuation rules and regulations, some key features are bound to go missing. This situation means that you will not receive the same benefits as a standalone policy, such as accident cover, caregiver allowance, travel allowance, or rehabilitation cover.
The downside of superannuation is that it has comparatively narrow conditions of release when it comes to claims in relation to its standalone counterpart. In the case of injury or illness preventing you from working, the legality involved in claiming has precise parameters, and anything outside of that is not acceptable. The person claiming must be either fully disabled or meet a temporary incapacity definition set out in the terms and conditions of the policy.
Areas needing cover that fall outside of these strict terms and conditions will not be allowed within your super. This limitation does make conditions less comprehensive than a policy owned outside a super fund.
For example, suppose you require funding for travel to your home when you get sick. In that case, your super will not cover this expense, never mind areas of greater concern like accident cover or the income lost due to being off work for rehabilitation after an accident.
Another aspect that could negatively impact the cost to you and make super income protection less comprehensive is that this type of cover is often a default insurance under superannuation funds.
A very typical illustration or representation of this shortfall is the benefit period. The benefit period is the duration over which the insurer will pay you if you cannot work. Although it is in some cases possible for you to get cover for up to 65 years of age, it is more common for a super policy only to cover you for five years by default.
Default cover is one that you do not specifically request but receive anyway as part of the policy guidelines. It is always advisable to go through your super procedures with a professional who can highlight which aspects are a default.
In many situations, if you want more cover or a more extended benefit period, you will need to apply for this feature. However, this will incur more cost to you by chipping away at your super savings, as your premium will increase accordingly.
KEY POINTS TO TAKE AWAY:
The benefit amount is more limited than a personally owned income protection policy. For example, it only covers what you earned a year directly before events leading to temporary disability.
Unlike standalone income protection insurance, the super fund manager will withhold the payment of excess funds that do not meet the terms and conditions of release.
Since income protection extends to a specific period in your super fund, limiting you to a maximum two-to-five-year benefit period, the chances are that you might be underinsured should you need to claim.
The fund trustees require you to meet both the policy definition and terms of conditions before releasing benefits.
Claiming can be more complicated and time-consuming because of the above policy release requirements.
You will need to use all your sick and holiday leave before your required waiting period even begins. Only then will you be able to claim. It certainly makes for weaker policy terms and conditions than an individually owned policy.
WHAT DOES IT MEAN TO SPLIT INCOME PROTECTION OWNERSHIP?
Although super income protection can work for everyone, it can quickly become disheartening to those looking to maximise their superannuation account balances. The fact that the premiums are coming out of the super fund while also trying to get as much money into it for saving later in life can feel counterproductive.
One way to alleviate this issue is to share ownership of income protection insurance between a superannuation fund and an individually owned standalone policy. By doing so, you can get the best of both covers. In addition, the standalone policy will complement the super by contributing all the extra benefits you cannot get within superannuation.
If you split or link your self-owned, standalone income protection policy with one within your super, your benefits could come out of either or both policy portions. Because of the limitations and strict legality of income protection within a super, you may not meet the criteria for a payout if something happens and, therefore, might not receive a payout. But if you split the policy, then payment can come from the portion of your income protection policy outside super, providing you with the financial aid you need.
Another perk to having a split policy is that you could have your premium paid out of your savings from your super fund and access the additional benefits provided by your standalone policy. The other benefits of the standalone portion of your policy can include nursing care, transport within Australia and from overseas, and family care.
The procedure for claiming from a split income protection policy can vary between insurers. Still, in general, you can expect that the one within your super fund will pay first if you meet all the conditions of release. Then any other portions of your claim that are not paid under your super policy can be assessed against the income protection policy outside super, providing you with the befits you need to stay afloat.
IS INCOME PROTECTION THROUGH YOUR SUPER FREE?
It is not often that you pay close attention to superannuation funds. As it is a mandatory requirement for all employees, it may lead to forgetting about its existence as the pool of funds is not entirely owned by you.
You might experience the typical ‘out of sight, out of mind’ scenario as you may not be contributing to the premiums out of your bank account. However, it would serve you well to remember that even though your super fund pays for your insurance premiums, it does not mean that it is free.
Although you might not be contributing out of your bottom line, your premiums are essentially coming out of the total amount that you will want to benefit from later in life. You may find that your fund is a lot lower and does not have enough to cover your needs when it is time to cash in your super.
Our advice would be to consider, shop around and see if there is not possibly a more suitable alternative. It may be that at this point in your life, income protection in your super is more affordable for your immediate situation and budget.
If this is the case, income protection within your super alone will benefit you greatly. If your cash flow is inconsistent or money is tight, having your super pay for income protection ensures you are less likely to cancel it if you hit a rough patch financially. When things get tricky is when you will need protection the most.
Income protection is tax-deductible if it is self-paid, so it might make sense to go that route instead of having your super pay for the premiums. If you have the cash flow to pay for it out of your
back pocket, this tactic could benefit you in the long run as you will not be depleting your super savings and balance.
CAN YOU CANCEL INCOME PROTECTION INSURANCE IN YOUR SUPER FUND?
Yes, you can remove your income protection policy from your super. If it is an active super fund to which you are paying contributions, you will need to contact the super fund provider to cancel. However, it will be wise to consider whether it is worth keeping before cancelling.
You may not be aware that when cancelling an insurance policy, you may not be able to get it back if you once again decide you want it in the future. For example, if you are presently in good health, but this changes after you cancel your policy, even in the most minor ways, it could affect your insurance application should you change your mind.
Before cancelling your super income protection insurance, think about these points before making a final decision:
Having a standalone income protection policy outside of your super might make having one within it redundant. Unless you make frequent personal contributions, having income protection within your super is chipping away at retirement savings.
If you cannot afford a standalone policy, it might be worth keeping your super income protection policy separate from your super. It might not pay you out as much as a standalone policy if you are forced to stop working temporarily, but it will still provide you with some cover to pay for your most essential living expenses.
If you decide to still go with an income protection policy inside your super, it is always advisable to review it regularly. For example, if your job situation changes or you earn a salary increase, your policy may cover that new amount. In addition, you can confer with your fund provider at any time to see what your options are according to your unique circumstances.
HOW DO YOU MAKE A CLAIM THROUGH YOUR SUPERANNUATION FUND?
An income protection claim through your super will require you to follow a few simple steps:
Contact your insurer and let them know you would like to lodge a claim. Your super fund provider can give you contact details if you are uncertain about who is insuring you.
You will be asked to fill out a form with details of your claim with a doctor providing evidence of your injury or illness. Your super fund might ask you for your I.D. and proof of the amount you earned before the incident.
The next step will be to submit your form and document to your insurer. They should respond within approximately ten working days. Once that is done, you will need to serve a waiting period of a maximum of 90 days before you can receive benefits.
You must first meet the disability definition as stated in the policy’s terms and conditions and meet the super fund’s temporary incapacity definition before you qualify to receive benefits.
CHOOSING A POLICY
Income protection can be the best thing you do for your family. With the peace and security, a policy will offer you, if you become seriously ill or injured, why would you not choose to make this decision?
Contact one of our WealthSmart advisors, who will guide you through each step in making an informed decision. With our knowledge and expertise, we can help you find the best income protection policy to cover income loss. So, if you’re looking to incorporate an income protection policy into your super or want help to increase your current level of cover, contact us for professional, personal advice today!