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Income Protection inside Superannuation

June 20th, 2012 | Posted by Editor in Articles

Income Protection policies have generally had ownership outside of superannuation up until mid July 2007, when the removal of Reasonable Benefit Limits (RBLs) was introduced prompting an increase in the amount of people taking life insurance through their super with the follow on effect of this being the increase in Income Protection being held within the super environment.

With a high percentage of Australian workers having heard of Income Protection insurance, but only about a third of them actually having an Income Protection policy. Any person who pays for Income Protection insurance either via concessional contributions to a superannuation fund or by making payment towards a policy held outside of super are eligible to a tax deduction.

The difference is there is no limit to the amount of premiums paid towards a policy outside of super in relation to deductions compared to a policy within super where concessional contributions are capped at $25000 for those under 50 years and $50000 for those over 50 years for the 2010/2011 financial year.

Some advantages and disadvantages of having Income Protection within Superannuation include

Advantages
• Insurance rates are generally the same for both smokers and non smokers
• Insurance rates may be cheaper as some funds offer group rate discounts
• Insurance premiums can be deducted from an existing super balance having less impact on cash flow of the individual
• Some funds may offer policies on an automatic acceptance basis avoiding any loadings or exclusions they may have been triggered by previous medical conditions

Disadvantages
• If the insured is part of an employer sponsored fund there may not be a continuation option available if the insured leaves
• Insurance premium payments may erode current superannuation balances
• Claims payments are subject to the insurer and then the trustee
• Certain ancillary benefits of Income Protection policies may not be available to those policies within super

Using the superannuation environment to fund insurance premiums including Income Protection does have some advantages, but individuals need to consider some of the limitations that may occur in the event of a claim being paid and the conditions of release of those benefits within their superannuation fund.

This material is not intended to constitute personal advice, and must not be relied on as such. This information has been prepared without taking into account your objectives, financial circumstances or needs. Before making a decision based on this material, you should consider the appropriateness of this material having regard to your own objectives financial circumstances and needs. You should consider obtaining independent advice before making any decision.

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