I have had Income Protection Insurance (IPI), Life Insurance (LI) and Total and Permanent Disability (TPD) insurance within my superannuation account for the last 7 years. When my superannuation account was set up, these insurances were automatically set up too.
Recently, my superannuation provider, wrote to me advising that not only are my premiums for all of my insurances going up from 1 July 2019, but my waiting period to access my income protection insurance is increasing from 1 month to 3 months.
Consequently, I decided that it was time to review my insurance options. Here’s what I found:
What’s the deal with Income Protection, Life and TPD insurance?
Income Protection Insurance
Income Protection Insurance, or salary continuance insurance as it is also known, replaces the income lost through illness or injury.
Most IPI policies insure for 75% of your usual income. Some include your usual employer superannuation payments as additional pay, and others don’t. So you need to make sure you check how your superannuation would be paid during any IPI usage period.
IPI is important for anyone who doesn’t have an emergency fund of 1-3 years of living expenses… Which, is most people. If you’re already covered for a few years in your emergency account, then IPI is probably not necessary.
As we are not yet financially independent, nor have a decent sized emergency account, income protection insurance is a must for us.
Life Insurance, or death cover as it is also known, essentially insures your death. If you die early or unexpectedly, LI provides a prescribed benefit to your nominee (usually your spouse, children, etc).
Whilst no one likes to think about their death, it is an inevitable fact of life. LI acts as a safety net for your loved ones; especially if you die young, when debt is usually at its highest.
If you have a family and a mortgage, LI is definitely worth considering. My beloved and I have enough cover to pay out our mortgage, should one of us pass early.
Whilst this won’t resolve all our financial requirements, it is enough to solve our biggest financial matter… Ensuring that neither one of us needs to worry about losing the family home, should one of us pass early.
Total and Permanent Disability Insurance
Total and Permanent Disability Insurance provides cover in cases where you are totally and permanently disabled. TPD insurance can help cover medical costs, living costs and future costs in the case of total and permanent disability.
Unlike IPI, TPD insurance does not cover temporary injuries or illnesses. It only covers you in the case where you are unable to return to work, permanently. Such examples include permanent mental and/or physical impairment suffered from an accident or illness.
Should I have these insurances inside or outside of my superannuation?
For LI and TPD insurance, it really comes down to cost and your personal preference.
If you have, or want, these insurances, start by getting some quotes from your superannuation provider and external providers. If your superannuation provider is substantially more expensive, then it might be worth reconsidering your options and going with an external provider.
However, if your superannuation provider offers competitive premiums, then have a think about what works best for you. If you don’t think you can afford to pay for these premiums out of your take home pay, your probably better off sticking with your superannuation provider, as the premiums will be deducted from your superannuation account, rather than your take home pay.
However, if you can afford the premiums and are highly focused on maximising the compounding potential of your superannuation, you’re probably better off having them outside of your superannuation.
When it comes to Income Protection Insurance, there’s a little more to it. In Australia, Income Protection Insurance is classed as an expense associated with having an income. Consequently, it is tax deductible for most people. This is a great benefit if you can afford to pay for the premium up front.
Now that I’ve reviewed my insurances, I am planning to move my Income Protection Insurance out of my superannuation. I will then be able to pay for the premium upfront and claim it as a tax deduction.
This will not only reduce tax obligations, but will also leave more money in my superannuation for compounding over the long-term.
Income Protection Insurance, Life Insurance and Total and Permanent Disability Insurance offer great protection and peace of mind for most of us.
In the absence of a significant emergency account, these insurances can help us, or our loved ones, out financially during times of personal crisis.
Just like with any insurances, be sure to do a thorough check of premiums and policy conditions before signing up or renewing a policy to make sure you’re getting the best bang for your buck.