Income protection insurance can provide a safeguard when you become sick or injured and are unable to work, leaving you unable to make your usual SMSF contributions.
What is SMSF Income Protection Insurance?
Most industry and retail super funds offer default income protection insurance for their customers. But with an SMSF, you’ll need to source and set up an income protection insurance plan yourself, to be held either inside or outside your SMSF. Income protection insurance pays up to 85% of your pre-tax income if you’re unable to work due to illness or injury.
You can purchase an income protection insurance premium through an insurance broker, a financial adviser, or an insurance company. Based on personal information like age, job, income, medical history, etc, the policy benefit and premium have arrived.
Benefits and Drawbacks of holding cover inside an SMSF:
Pros
- Premiums are generally tax-deductible
- No out-of-pocket expenses (premiums are paid with members’ contributions)
- Increased cash flow for members outside of super because premiums are paid by the SMSF
- Ability to customize insurance to suit members’ specific needs (not always possible with a larger super fund)
- A simple application process as underwriting is usually not required for the default level of cover
Cons
- Can be more expensive due to the lack of access to the group insurance rates available to larger funds
- Benefit payments paid to non-dependents are generally subject to tax
- Medical underwriting is required (this isn’t necessary with larger super funds)
- The claims process can take longer due to trustee compliance requirements
- Income protection benefits can only be paid for the period of incapacity (unlike outside super)
- Retirement savings may be depleted due to insurance payments being taken from members’ contributions
Source: smsfinsurancepartners, finder.com and smsfinsurance.com.au
