Typically, superannuation funds have three types of insurance for members:
- Death cover (also known as life insurance) – This pays a benefit to your beneficiaries when you die
- Total and permanent disability (TPD) cover – This pays you a benefit if you become seriously disabled through illness or injury, and are unlikely to ever be able to work again
- Income protection (IP) cover – This pays you an income stream for a specified period if you are unable to work due to temporary illness or disability.
Your income protection policy will outline how your insurance covers you. This is usually for a specified percentage of your current regular income (usually 75 per cent of your gross salary) and for a set length of time.
If you are unable to work because of illness or injury, you can make a claim and your income protection insurance will activate. There is normally a waiting period of 30 to 180 days before benefit payments begin, and payments are usually limited to a maximum of two years. After the waiting period, the policy will pay you the agreed amount either until you are able to return to work or for the specified period of time – whichever is sooner.
Who should get income protection insurance?
Income protection is particularly useful for households where one person provides the income. Obviously, if that person is temporarily out of action due to illness or disability, there will be financial strain as a result. This is especially so if you are paying off a mortgage or other significant loans.
Because everyone’s situation is different, it’s worthwhile comparing different types and/or levels of income protection insurance, and to work out your own needs, should you be unable to work for a while. For example, someone with a family and a mortgage will need more cover than a single person living alone.
Remember, too, that you can only insure your income from personal effort or employment. That means you can’t insure income from investments (e.g. shares, long term deposits). The policy will also not pay out for redundancy or unemployment.
Also, if you will have enough money to manage for a while without claiming on your insurance (for example you’ll receive sick pay from your employer), then you may be able to save on your income insurance premiums by choosing a longer waiting period before payments begin.
How much does it cost?
The cost of income insurance will vary, depending on a number of factors, such as:
- Your age
- Your job
- The percentage of your income that you’d like to cover
- Your choice of waiting period length
- The illnesses and injuries you need covered
- Your current health, weight and family medical history
- Whether you smoke or have previously smoked
What are the pros and cons of income protection insurance through my super?
As with any type of insurance through your super fund, there are factors worth considering. Let’s look at a few:
- Usually cheaper – Super funds purchase insurance policies in bulk, so they can offer better deals on premiums. This means that, even when money is tight, you can still get cover
- Easier to manage – Premiums are deducted automatically
- May not need a health check – Depending on the fund and the amount of cover you’re after
- Limited cover – Not all types of insurance, or levels of cover, are offered
- Not portable – If you move to another super fund or your employer's super contributions stop, your cover may stop without notice
- Ends around retirement age – Insurance coverage through super often ends when you reach a certain age (usually 65 or 70), while external policies may cover you for longer.
- Reduces your super balance – The cost of your insurance premiums are deducted from your super balance, reducing the money available for your retirement
- Added complexity – When you make a claim, you need to satisfy the trustee of the super fund as well as the fund’s insurer in order to receive a payout. In other words, the benefit is not paid directly to you, but to your fund, which then decides whether to release it to you.
You should compare the terms and conditions of the income protection policies on offer from your super fund with those available from outside insurers.
If you decide to obtain income protection insure, make sure you review your policy from time to time, to ensure that your premiums are competitively priced and that the cover you have is still appropriate. For example, you may want to increase your cover if:
- You’re going to become a parent
- Your partner stops working
- You’re taking out a new mortgage
On the other hand, you might be in a position to decrease your level of cover if you start a new job and it comes with increased sick pay.