Income protection (IP) insurance held inside superannuation pays a regular monthly benefit if you are unable to work due to illness or injury. Most super funds include some form of IP as part of their default insurance package — but the cover offered is often more limited than retail IP policies.
How Income Protection in Super Works
When you cannot work due to illness or injury:
- You submit a claim to your super fund’s insurer
- A waiting period applies (typically 30, 60, or 90 days from when you stop work)
- After the waiting period, you receive a monthly benefit (usually 75% of your pre-disability income)
- Benefits continue for the benefit period — typically 2 years or 5 years in super (rarely to age 65)
- Payments are made monthly until you return to work, reach the end of the benefit period, or the disability ceases
Key Features of Super IP Cover
| Feature | Typical super IP | Good retail IP |
|---|---|---|
| Benefit amount | 75% of salary (up to an insurer cap) | 75–85% of income |
| Waiting period | 30, 60, or 90 days | 14, 30, 60, or 90 days |
| Benefit period | 2 or 5 years | 2, 5 years, or to age 65/70 |
| Definition of disability | Total disablement (most common in super) | Can be partial or proportional (better) |
| CPI indexation during claim | Sometimes | Usually yes |
| Tax treatment | Premiums deductible through super; benefits taxable income | Same if held in super |
| Premium payment | From super balance | Can be cash or super |
The Benefit Period Problem
The most significant limitation of super IP cover is the benefit period. A 2-year or 5-year benefit period sounds sufficient — but if you suffer a serious illness at 40 and cannot work for 10 years, you would only receive 2–5 years of payments.
Retail IP policies can offer benefit periods to age 65 or 70 — providing cover for the duration of your working life. This is particularly important for higher-income earners and professionals.
“Total Disablement” vs “Partial Disablement”
Most super IP policies require total disablement to trigger benefits — meaning you must be completely unable to perform the duties of your occupation (or sometimes, any occupation). This is a higher bar than “partial disablement.”
Retail IP policies can include:
- Partial disablement benefit: Pays a proportional benefit if you can only work reduced hours or capacity
- Own occupation definition: Pays if you cannot work in your specific occupation (not just any job)
For professionals in high-skill occupations, the partial disablement feature can be critical.
Tax Treatment
Premiums:
- If paid from super, premiums are generally not tax deductible by the member (the fund deducts the premium from your account)
- If IP is held outside super with cash premiums, they are generally tax deductible
Benefits paid:
- IP benefits are taxable income regardless of whether the policy is held inside or outside super
- A Medicare levy surcharge does not apply to IP benefits
When Super IP Cover Is Adequate
Super IP may be sufficient if:
- Your cover need is 2–5 years (e.g., to cover a mortgage and short-term income gap)
- You have substantial savings that would support a longer disability
- You are on a moderate income where the insurer’s cap isn’t binding
When to Consider Retail IP
Consider retail IP if:
- You have dependants and high income to replace
- You want a benefit period to age 65
- You need partial/proportional disability benefits
- You want own occupation definition
- Your work involves specific skills that could be disabled while you remain able to do other work
For more: Death Cover in Super, TPD in Super, Group vs Retail Insurance, Super Insurance Claims. For advice on your situation, speak with a licensed financial adviser via MoneySmart.