By Philip Saal

More and more individuals are choosing for their life insurance to be held within their superannuation fund. Term Life and Total & Permanent Disability (TPD), in particular, are commonly held within superannuation. But what about Income Protection Insurance? Is it better to hold this form of cover inside superannuation or directly in the individual’s name?

Deciding whether to hold your income protection insurance inside superannuation or not will come down to your own individual circumstances.

What is Income Protection Insurance? Income Protection Insurance provides you with a monthly income to compensate you for the loss of salary/income should you become ‘Totally Disabled’. The benefit paid could be used for living expenses, regular investment and other costs, thus keeping yours and your family’s lifestyle and plan on track.

Theoretically, the benefit payable under an income protection insurance arrangement can be up to 100% of a member’s pre-disability earnings. However, insurers are generally not comfortable with providing members with a benefit equal to 100% of their pre-disability earnings as there is no incentive for the disabled member to return to work. Consequently, most income protection insurance arrangements dictate that the benefit provided may only be up to a maximum of 75% of pre-disability earnings.

Income Protection/Salary Continuance Insurance within Super Salary continuance insurance is a term that is used to describe income protection insurance held within a superannuation fund. It is also sometimes referred to as total and temporary disablement (TTD) insurance.

If a member has taken out income protection insurance through a superannuation fund and becomes temporarily disabled, the amount of the payment and the taxation treatment will depend on two definitions:

1. If the member can satisfy the definition of total or partial disability in the insurance policy, the income protection insurance proceeds are paid by the insurer to the trustees of the superannuation fund, and
2. If the member satisfies the definition of temporary incapacity, or another condition of release, which is contained in the Superannuation Industry (Supervision) (SIS) legislation, then the trustees of the super fund can pay the proceeds of the insurance policy to the member.

An amount payable to a member from a super fund under an income stream due to a member’s temporary inability to engage in gainful employment is regarded as ordinary income for tax purposes. The income will be assessable to the member who will pay tax at their marginal tax rates.

Condition of release for salary continuance In order for the member to receive salary continuance benefits through their superannuation fund, they must satisfy the SIS definition of ‘temporary incapacity’.

In ClosingThe primary reason individuals decide to have their income protection cover inside superannuation is to do with cashflow. However, the restrictions on access to benefits paid from an income protection policy held within super could outweigh any personal cashflow issues. Premiums on income protection insurance are also tax deductible to the individual. No other insurance policy type offers a tax deduction to the individual.

We recommend individuals carefully weigh up the pros and cons, therefore, of holding this type of cover inside superannuation.