Will your insurance provider approve your claim?

Maybe not! Take 3 minutes to read this checklist…

Many clients have income protection (sometimes called salary continuance) insurance via their super fund. However, too often, clients do not understand the limitations of this cover so please take 5 minutes to review the dot points below to understand if you and your family are adequately protected. [Income Protection insurance provides a regular monthly benefit in the event that you suffer an accident or illness and cannot work. There’s typically a “waiting period” which is the amount of time you need to be off work before claiming and a “benefit period” which is how long the insurer will pay a benefit for. Click here for more.] I have compared income protection cover provided by AustralianSuper (a leading industry super fund) and TAL (formally Tower Insurance) as an example of how the quality of cover provided by super funds differs from that provided by retail insurance providers. This is provided for illustrative purposes only and of course other super fund and retail products will differ from this, but the “theme” is typically consistent in that cover provided by super funds is vastly inferior. I will refer to the cover provided by AustralianSuper as “Super” and the cover provided by TAL as “Retail”.

  • They can overrule your doctor – Super has the discretion to reduce the benefit it pays you by the amount that you could reasonably be expected to earn while sick/disabled whereas Retail has no scope for reducing the benefit. This might occur (for example) where Super disagrees with the medical practitioner’s advice that you cannot perform your work duties. If Super thinks you can perform some duties it may pay you a partial benefit.
  • May reduce your benefit if your income has changed – Your income (and therefore benefit) will be defined by Super as annual amount of remuneration immediately prior to illness whereas Retail will define your earnings as the amount of cover you have applied for. What happens if you lose your job and are unemployed for a while and then suffer an accident or illness? You may not get any benefit if your cover is with Super. Whereas with Retail, in that event, you would still get the full benefit even though you aren’t employed and earning an income (assuming your policy is agreed value).
  • Reduce benefit if you receive sick leave and other income – Super will reduce the benefit paid to you by the amount of income you receive from other insurance policies (whether disclosed at application or not), workers compensation, sick leave or any other personal exertion income. Retail can only reduce the benefit by the amount of income you receive from other insurance policies if they were not disclosed at the time of application. Retail cannot reduce the benefit if you receive sick leave, workers compensation, casual or consulting income and so on.
  • If you do any work (just 1 hour) you may stop receiving any benefits – Super will deem you totally disabled (and therefore entitled to a benefit) if you cannot perform one or more important duties of your own occupation, you are under medical care and are not working in any capacity whatsoever. Retail has a less strict definition and allows you to be working up to 10 hours per week. So you may be forced to return to full working hours instead of a staged return to work which might be preferable for rehabilitation purposes.
  • They can cancel cover at any time – Super may cancel your policy at its discretion at any time. As long as you keep paying the premiums for Retail, the cover is guaranteed to be renewed each year. This is important as you can still have cover if you become unemployed, stop work to have or look after children, undertake a lower paying job and so on.
  • Injury must be violent – Super defines “injury” as caused by accident, violent, external and visible means so it’s unlikely a back strain and repetitive strain injuries would be covered. Retail does not define “injury” to be violent or visible.
  • Inflation will diminish your benefit – Super does not index your benefit whilst on claim. This is important as if you suffer a prolonged illness and your benefit isn’t indexed with CPI, your benefit’s purchasing power is eroded. E.g. $5,000 per month will buy you a lot less in 10 years’ time compared to today. Retail indexes your benefit by CPI until age 65.

Other ancillary benefits of Retail cover over Super:

  • Retail provides an ‘accident benefit’ options which allows you to receive an immediate benefit if you are disabled for 3 consecutive days (e.g. you are in a car accident). This means you don’t have to serve out the normal waiting period. Super provides no such option. The same terms apply if you suffer an illness and are confined to bed for 3 days – Super has no such benefit.
  • Retail provides a child care benefit of $500 per month for 3 months if you require child care assistance. Super does not.
  • Retail will waive premium payments for 3 month if you become involuntary unemployed. Super will not.
  • Retail provides other ancillary benefits such as family support benefits (if a family member has to stop work to look after you), child critical illness benefit (if your child suffers a critical illness), accommodation and transport benefits, premium pause options and so on.

Like with most things in life, you get what you pay for.

Most importantly, please check your benefit period isn’t limited to only 2 years

The benefit period is the length of the cover whilst you are partially or totally disabled. Retail offers cover up to age 65. Super typically only provides two years of cover. The risk you need to consider is prolonged illness – for example, not being able to work for 5+ years. 40% of income protection claims last longer than 2 years so prolonged illness is a statistical risk that must be considered.

And you will have to satisfy the legislation to receive the benefit payment

If you have cover inside your super fund you must meet the release rules specified in Item 109 in Schedule 1 from the Superannuation Industry (Supervision) Regulations 1994. Essentially, for your super fund to release the insurance proceeds to you, the legislation requires that you are not receiving any income from employment and you must have been gainfully employed immediately before suffering illness or accident. This could prevent you from returning to work in any capacity other than full time (as working part-time may prevent your Fund from releasing your benefit).

What’s the cost differential?

Income protection cover via AustralianSuper for a male aged 38 (professional manager) for a monthly insured benefit of $9,000 with a 2 year benefit period will cost approximately $131 p.a. The same level of cover via TAL (retail insurer) will cost $75 per month (or approximately $45 per month after tax) so cover inside super is significantly cheaper. For your information, full cover (i.e. benefit period to age 65, not 2 years as this isn’t adequate) will cost approximately $120 per month (or $110 per month after tax). One of the benefits of having cover inside super is that it doesn’t impact on your personal cash flow (because the premium cost comes out of your super account). Obviously it does eat into your retirement savings.

Typically, income protection inside super just isn’t adequate

Income protection cover insider super is better than no cover at all. However, when it comes to protecting yourself and your family, I strongly believe that cover inside super has too many holes in it and doesn’t provide adequate coverage for most people. As such, it’s often important to have some level of Retail cover. Whilst this comes at a cost (as the premium is paid from your personal cash flow), the premium is tax deductible.

What next?

The above is a comparison between two insurance options for illustrative purposes so you should not rely solely on this information. If you have cover inside your super fund, contact us and we can run a research report for you to assess the quality of your existing cover (just email Kristy Dishon your details and ask her to run some research reports for you). If you aren’t satisfied with the quality of cover (or you don’t have any), we will take you through some options to improve your cover within your budget.


Disclaimer: This advice does not take into any of your objectives, financial situation or needs. For this reason, before you act on this advice, you should consider the appropriateness of the advice taking into account your own objectives, financial situation and needs. Before you make a decision about whether to acquire an insurance policy, you should obtain and read the product disclosure statement.