Income Protection Inside Super vs Outside

May 20, 2017

Income protection insurance will provide a regular monthly income whilst unable to work due to sickness or accidents.

There are many differences between owning income protection inside superannuation or outside of superannuation.

Generally, individuals can claim a tax deduction for the premiums paid on an income protection policy to reduce the effective cost of the policy. However, the tax deduction amount will depend on whether the policy is owned either inside or outside of super:

Income protection owned outside of super is generally tax deductible against the personal income of an individual and a tax credit is received at the individuals marginal rate of tax (up to a maximum limit of 45%).

Income protection owned inside of super is tax deductible to the super fund, but the fund is limited to a 15% tax credit.

In addition, self-owned policies outside of super generally provide a more comprehensive coverage, including ‘plus’ or ‘premier’ policy features/benefits, whereas policies inside of super provide only standard basic coverage.

Some examples of features that are available outside of super, and not in a basic coverage inside super are:

  • Child Care Benefit
  • Child’s Critical Illness Benefit
  • Rehabilitation Benefit
  • Overseas Assistance Benefit
  • Accommodation and Transport Benefit
  • Involuntary Unemployment Benefit
  • Job Security Benefit
  • Return to Work Benefit
  • Cover Continuation Benefit
  • Guaranteed Future Insurability Benefit

Income protection held inside superannuation will also reduce an individuals retirement benefit amount, because the premiums will be debited from your superannuation balance on a monthly, quarterly, half-yearly or yearly basis.

Another difference is whether an individual wants an agreed value policy or an indemnity policy:

Policies held outside of superannuation can be either agreed value or indemnity.

However if inside super, there is only the option of indemnity.

Under superannuation ownership, an indemnity contract benefit payment is determined by an individual’s earnings in the 12 months immediately prior to the person becoming temporarily incapacitated, meaning the insurer will pay a benefit that is the lesser of the sum insured or the personal income earned in the 12 months prior to a claim (which is not good news if there is a reduction in income prior to claiming).

An agreed value claim payment is based on the individual’s income at time of application and will be guaranteed to be paid at claim, even if their income has reduced.

The above few points are a summary of some key differences between the two policy ownership structures – we always recommend you or your clients receive personal advice before making decisions about superannuation, insurance products and personal financial circumstances.

SMSF Life Insurance Reviews

The information SMSF Life Insurance Reviews provides in its blogs, software and on its websites is of a general nature only and does not take into account your (or your clients’) personal circumstances.

Investment Trusts Whitepaper

Learn more about the investment trust opportunity and explore how accountants can overcome common administration challenges to build a robust and scalable offer

Download Whitepaper

Latest Resources

Class welcomes SMSF flexibility announced in Budget 2021

May 13, 2021
The Budget 2021 includes a number of positive measures specific to the wealth accounting sector that are to be welcomed, but the industry needs ongoing evolution through government, according to Class Limited CEO, Andrew Russell.

Grow your business. Request a personalised Demo.

We’re here to help. Why not request a demo, so you can see first-hand how intuitive our solutions are, and the dramatic productivity gains they can deliver?