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Insurance within super

Income protection

Section: 10.5

The income generated through a members employment can be insured by taking out a cover called income protection. Income protection is important for those who rely on their ongoing income, rather than investment or passive income, to cover living expenses and services debt. Again, similar to term cover and TPD, income protection can be held within the superannuation environment.

Trustees of the superannuation fund, income protections proceeds can generally be release to the life insured (a member of the superannuation fund) under the temporary incapacity condition of release. A member is temporarily incapacitated where they cease work as a result of physical or mental ill-health which does not constitute permanent incapacity. Employment does not need to fully cease.

If the temporary incapacity condition of release is met, income payments are paid from the fund to replace in part or in full, the gain or reward the member received before their incapacity. The payments cannot result in the individual's income exceeding their pre-disability income (e.g. they generally could not be simultaneously receiving full sick leave pay and benefits through this condition of release).

The 1 July 2014 changes also mean that income protection policies that pay a partial benefit where a member only reduced their hours of work due to incapacity, rather than ceasing them completely, cannot be offered within the superannuation environment.

Proposed changes from 1 July 2020

The insurance regulator, APRA, proposed changes to features of income protection policies. The proposed changes will only address new policies and focus on what is seen as generous features of insurance policies that can act as deterrent to returning to work.

Agreed value policies are no longer sold from 1 April 2020, and by 1 July 2021 other measures are proposed such as:

  • Insurance providers will no longer be guaranteed renewable
  • Benefits will be based upon the insured person's income over the preceding 12 months
  • Policy coverage terms shall not exceed five years.

APRA announced these serious of changes on 2 December 2019 to address flaws in product design and pricing that are contributing to unsustainable practices in the sale of income protection insurance.

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

Last modified: Wednesday, August 25, 2021