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No need to get sick with worry

A new feature of income protection insurance covers super contributions.

A new feature of income protection insurance covers super contributions.

A little-known insurance option that maintains your super contributions if you're seriously ill or injured has its attractions if you consider the long-term impact of a super "gap". But some advisers wonder whether that's the prime consideration at a time when you may need every last cent.

A handful of insurers offer a "super protection" option that can be joined to income-protection cover.

In essence, if you need to call on your policy because of illness or injury that's outside sick leave, not only do you receive up to 75 per cent of your actual or agreed income but also full or partial super contributions paid on your behalf.

However, insurers structure this product in a variety of ways, meaning you need to ascertain whether super contributions will be on top of your income protection benefits or, in effect, come out of them.

THE BENEFITS

The national manager for risk insurance with the RI Advice Group (formerly RetireInvest), Col Fullagar, believes people should use insurance to protect not just the income they spend but the income they'd otherwise save.

With standard income protection insurance, benefits are capped at 75 per cent of your income so there's an incentive for you to return to work, he says, "and you're going to spend it all, give or take an inch, on your day-to-day expenses".

That leaves nothing for super. But a contribution gap of several thousand dollars while you're off work will leave an even bigger hole when you consider the impact on your retirement savings over 10, 20 or 30 years.

Fullagar gives the example of a 45-year-old professional earning $200,000, contributing 10 per cent to super, who is off work with a debilitating case of depression for two years. Income protection means his family can keep up their standard of living but the super contributions fall by the wayside.

Assuming inflation is steady at 5 per cent a year, the $40,000 gap in contributions over those two years will compound to an overall funding gap of about $105,000 by the time he retires at 65. So why is it that less than 5 per cent of people add the super contribution option to their income-protection cover?

CASH IN HAND

A risk specialist at Centric Wealth, Roy Agranat, says his concern is that this option, depending on the way it's structured, can leave people worse off in terms of cash in hand at a time of illness or injury, when they're already on a reduced income because of the cap on income protection.

If you want to consider it, you should ascertain how the particular product calculates benefits. Does it base the benefits on your total package including super, or are they based on your salary before super? Will you get 9 per cent or 10 per cent super with the product or a smaller proportion?

Depending on the product you choose, you might achieve an outcome of 77.5 per cent of your package or 85 per cent of your package. But within that there'll be differing results in terms of how much of the total benefit is cash in hand.

TAX AND SUPER RULES

Fullagar acknowledges that variations of this product have different outcomes and says people should seek professional advice on which option best suits their needs.

However, he likes the Tower Life product, where you get 75 per cent of your total pay (including super), plus a further 10 per cent paid as super contributions.

Agranat says tax and super rules throw up other potential issues. For instance, contributions could be made by the insurer on a client's behalf that inadvertently exceed their contribution caps, endangering tax concessions, he says.

Key points

- A gap in super contributions can have a big impact over the long term.

- An income protection option can fund continued super contributions.

- However, your priority may be cash in hand at a time when your income is reduced.

- Be aware that super protection products are structured in several different ways.


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