When it comes to choosing which income protection is better – inside or outside superannuation -it is best to make an educated choice. But it does not happen easily. An expert’s advice may be needed. Not only does an individual’s needs are to be given consideration but as well as the changes that can occur after 5 to 10 years.
So which income protection is better – inside or outside superannuation? Outside super is ideal for people who are working on a more comfortable retirement years and want to maximize their contributions. It also works well for those who can afford it.
In case of a limited income, cover within super will do well in the same manner that is will serve well for those without ancillary benefits.
Factors differ in and outside super but both come with tax deductibility benefits and taxes are applied on receipts of benefits marginal rates. The costs on both after taxes are the same.
The income of an insured is not affected by a policy within super. Its costs may be taken care of by the 9% of contributions or accumulated balances.
Not each insured finds the cover features within super to their advantage. Concessional contribution cap now at $25,000 is subject to erosion when it includes funds from super contributions.
When choosing IP within super, a trustee has to comply with the Superannuation Industry Supervision Act (1993) requirements. Unlike IP outside super where the insured has to comply only with the terms of the contract, a trustee must meet all requirements to get temporary incapacity benefits.
In the event of payment for non-commutable income in replacement for pre-incapacity income, the benefits are limited.
There are also risks involved regarding ancillary benefits within self-managed super fund. As for granting of benefits for total and permanent disability (TPD) outside super and granting of benefits for IP inside super, considerations are still made.
When granting benefits, only permanent incapacity is covered under TPD and temporary incapacity under IP.
Clients may also question the excess funds that super funds retain in case a certain policy contract value goes higher than pre-disability income. Cushioning such cases is done with the 75 per cent rule (an income protection pre-incapacity income benefits limit).
Where release conditions within super allows up to 100% payment, it may not be the same compensation for IP that is held together with ancillary benefits.