Income Protection Insurance & Superannuation: Inside vs Outside Superannuation

An income protection insurance policy can keep you supported financially if you become unable to work due to illness or injury.

In this guide, we’ll look at the various pros and cons of obtaining income protection insurance through a superannuation fund, compared with getting a policy directly from a life insurance company such as NobleOak.

We’ll also explain whether this type of insurance is tax-deductible inside superannuation.

What is income protection insurance?

Income protection insurance provides financial protection for you (and your family) if you suffer a sickness or injury which prevents you from working.

With an active income protection insurance policy, you have the reassurance of knowing that you can still pay some of your bills even if you can’t earn an income because you’re unwell or injured. This gives you time to recover, without having to worry quite so much about money.

You can learn more about it in our guide: Is Income Protection Worth It? The Pros And Cons.

Income protection insurance inside of superannuation

Many Australian super funds offer income protection insurance as an option for their members. In most cases, the insurance premium payments are deducted from your super. When you obtain income protection through super, the policy is likely to be ‘one-size-fits-all’, which means you might not be able to customise it to better suit your specific needs.

In the next section, we’ll explore the key advantages of having income protection insurance inside a super fund:

Advantages of holding an income protection policy through superannuation

There are a number of advantages to having income protection insurance inside a super fund. These include:

• Easy premium payments: In most cases, the premium payments come out of your super balance. This means you don’t need to worry about paying a monthly bill.
• Potential tax savings: If you contribute to your income protection policy through your super fund using pre-tax income (like salary sacrifice) or by claiming a tax deduction for your contributions, you may pay less tax overall.
• Potential discount on premiums: If your income protection cover is held in an insurance-only super fund, you may be eligible for a 15% rebate on premiums paid using funds rolled over into the account. This rebate comes from a tax deduction the fund claims (and passes back as a saving).
• Less tax admin when receiving benefit payments: If you become eligible for benefit payments from your income protection in super policy, the fund’s trustee will generally deduct PAYG (Pay As You Go) tax before the money reaches your account.

Disadvantages of holding income protection policy through superannuation

Having income protection through superannuation can also come with some significant disadvantages. These can include:

• One-size-fits-all policy might not meet your needs: Income protection through super is often a standardised policy with limited options. You may not be able to tailor the features (like benefit period, waiting time, or extras) to suit your specific job, income, or lifestyle. That could mean you’re underinsured or not covered in the way you need most.
• Premium payments can reduce your retirement savings: When income protection premiums are paid from your super balance, they come out of your retirement savings. If you don’t top up your super with extra contributions to offset the cost, your long-term savings could take a hit. Your top ups are subject to a concessional contributions cap so your ability to top up by extra contributions may be limited.
• Your medical history might only be checked when you make a claim: With default group cover through super, there’s often no medical check or extensive underwriting questions when you first join. That might sound convenient, but it can make things harder later, especially if you have pre-existing conditions, as your medical history could be reviewed in detail when you go to make a claim and you may not receive benefit payments as a result.
• Premium payments count towards your super contribution limits: If you make extra contributions to your super to cover income protection premiums, those amounts still count towards your annual contribution caps. This could limit how much more you’re able to contribute to boost your retirement savings.
• You might have to pay extra fees when rolling over from another super fund: If you transfer money from another complying super fund to cover your income protection premiums, additional fees may apply.
• You have to meet two sets of rules before you can be paid benefits: If your income protection is held through super, it’s not enough just to meet the insurer’s definition of being unable to work – you also have to meet a legal condition under superannuation law. This usually means you must have actually stopped working due to illness or injury before the trustee can release your benefit.
• Benefit payments can take longer to reach you: When claiming income protection through super, benefit payments usually go to the super fund trustee first, not directly to you. This extra step can cause delays in receiving the money.

Is income protection tax-deductible in super?

Generally, you can’t claim a personal tax deduction for income protection premiums paid through your super fund. However, the superannuation fund itself may be able to claim a tax deduction for the premiums it pays on your behalf. This applies to most income protection superannuation policies held through a complying super fund.

Income protection insurance outside of superannuation

As an alternative to income protection insurance inside a super fund, you could choose to take out a policy from an independent life insurance provider such as NobleOak. This means that you’ll need to make regular premium payments to keep your income protection insurance policy active.

This approach comes with its own set of advantages and disadvantages, which we’ll explore next:

Advantages of holding income protection outside of superannuation

There are several reasons why many people prefer to hold income protection insurance outside their super fund. Key advantages include:

• You can usually claim premium payments as tax deductions: If you take out an income protection policy in your own name and you’re also the person being insured, you can generally claim the cost of the premiums as a tax deduction.
• You know what you’re covered for from the start: With income protection insurance outside super, the insurer checks your medical history before your policy begins. This means you clearly understand what conditions are covered (and what might be excluded) well before you ever need to make a claim.
• Income protection policies outside super are generally more secure: Insurance through super can change if the super fund negotiates new terms with the insurer. On the other hand, income protection policies outside super are usually ‘guaranteed renewable’, meaning once you have your policy, your benefits won’t be reduced.
• You can tailor the policy to suit your needs: Policies held outside of super often offer more flexibility and higher sums insured. You can customise the cover and even choose different ownership options – for example, using the policy to help cover business expenses if you can’t work due to illness or injury.
• You might have the option to receive a lump sum instead of monthly payments: Some policies held outside of super let you swap your regular income payments for a one-off lump sum, depending on the situation and your policy terms.

Disadvantages of holding income protection outside of superannuation

Let’s now look at the disadvantages of holding an income protection insurance policy outside of a super fund:

• Only part of your premium payments may be tax deductible: If your income protection policy covers both income replacement and lump-sum payments, you can usually only claim a tax deduction for the part of the premium related to income replacement (not the lump-sum benefits) and you’ll have to allow for the admin of claiming for your income protection payments in your tax return.
• You might need to set aside money for tax: If you successfully make a claim on your insurance policy after becoming unable to work, tax usually isn’t taken out of the benefit payments. That means you’ll need to plan ahead and budget to pay any tax owing when you do your tax return.
• You’ll have to allow for regular payments to keep your income protection policy in place.

Is income protection tax-deductible outside of super?

If you hold an income protection policy outside of superannuation, you can generally claim a tax deduction for the premiums you pay, as long as the policy is designed to replace your income if you can’t work due to illness or injury.

This is different from super income protection policies, where premiums are paid through your super fund and you usually cannot claim a personal tax deduction.

Claiming premium payments on an income protection insurance policy held outside super can help reduce your taxable income, making it a popular option for many Australians.

Income protection in super vs outside super

With an income protection insurance policy from NobleOak, you can breathe easier knowing that you’ll be covered if unexpected health problems prevent you from working. Our online quote tool provides a quick and easy way to see how much your premiums might cost.

NobleOak is proud to offer award-winning income protection insurance, keeping working Australians financially protected during times of difficulty. Please feel free to get in touch with us on 1300 041 494 to discuss your insurance options.

Any financial product advice is general in nature only and does not take into account your individual circumstances, objectives, financial situation, or needs. Before acting on it, please consider the appropriateness of the information, having regard to those factors. Any third party websites or tools referred to are subject to their own terms and conditions and NobleOak Life Limited makes no representation or warranty as to any information on those websites. Persons deciding whether to acquire or continue to hold life insurance issued by NobleOak Life Limited should consider the relevant Product Disclosure Statement and Target Market Determination for the product. NobleOak Life Limited ABN 85 087 648 708 AFSL 247302.