Navigating the insurance minefield Pt III: Income Protection
Unlike life insurance, income protection is generally best taken outside of super, as Richard Livingston and Liam Shorte explain.
- Human capital is the most valuable asset for many people
- Critical to insure it with income protection insurance
- We explain why you should take it outside of super and highlight potential pitfalls
In sole purpose test’ will be breached.
For all these reasons we’d generally suggest taking out an IP policy in your own name.
But there are some situations where you might consider taking out IP through super, including:
If you’re struggling with cash flow, taking IP through super effectively enables you to access your compulsory super contributions to pay the premiums.
For employer-sponsored plans, premiums might be more competitive as you become part of a group risk. In this case you need to weigh up the lower premiums against the disadvantages of taking it through super.
‘Automatic acceptance limits’ have increased for employer-sponsored plans, potentially making it easier to get cover through your employer super where personal health issues might make it difficult to get cover.
- If you’re a low-income earner (assuming you’re not fully utilising your concessional contributions cap), funding IP premiums by making extra super contributions may allow you to get the Government co-contribution. But you need to be careful that, down the track, you’re not going to run into one of the problems we identified above.
Finally, if you’re in an employer-sponsored plan that offers basic IP cover, that may be enough for your purposes. In this case, it might be simpler to stick with what you’ve got rather than go through the process of setting up an IP policy outside of super.
Choosing your insurer
There are many insurance companies offering a range of IP insurance in Australia. It’s essential to make sure that whatever policy you purchase has clearly worded and flexible core benefits, as 90% plus of claims will be for standard illnesses and injuries.
Good insurers will pay claims quickly while others will look for a reason not to pay. Larger, more established, brands have more to lose with their reputations so they tend to play by the book and Liam tends to stick with the likes of AIA, AMP, Asteron, CommInsure, Macquarie Life, MLC and TAL, for his clients.
Many low-cost policies have pre-existing condition exclusions, some of the traps noted above, and work to deny claims wherever possible. Make sure you’re aware of their limitations before spending the money on the premiums.
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