There are pros and cons to taking income protection through your super fund.

Superannuation funds have long provided a minimum amount of “default” life insurance to members but many are now starting to add other types of insurance, which raises the question of whether your super fund is the best place for all this cover.

Leading industry super fund AustralianSuper – which has more than 1.4 million members, or roughly one in every 10 workers – announced recently it would also make income protection automatic from early next year, along with life cover.

As part of a new deal with insurer Tower Australia, AustralianSuper will provide default income protection cover that pays 75 per cent of salary, plus 10 per cent super contributions, for up to two years in the event of illness or accident.

Insurance specialists say there are definite advantages to buying some types of insurance through super but people need to do so with their eyes open because super-based insurance is more complex and premiums will erode retirement savings. Also, policies structured for a group won't necessarily fit an individual's circumstances.

A risk specialist at Centric Wealth, Roy Agranat, says there are three main advantages: generally its cheaper because you're accessing wholesale rates; group policies involve “automatic acceptance” up to a set level of cover with no medical questions asked; and "smokers and non-smokers pay the same rate”.

A senior insurance manager at AustralianSuper, Greg Staunton, says its members will have access to as much as $20,000 a month in income protection without the need for medical checks, under automatic acceptance.

Also, there's no restriction on occupation in the AustralianSuper scheme, whereas outside members might find an insurer won't cover a certain job because it's deemed too risky. Another important advantage of super-based insurance is it overcomes apathy.

Agranat says: “If you spoke to 100 people in a group plan, you'd find a very low percentage would actually have taken out personal income protection. This gives them something they didn't have – they don't have the hassle of going to search for it."

Young, single people tend to consider themselves “bulletproof”, he says. “They don't bother about income protection, yet at this stage of life their biggest asset is their ability to generate an income.”

The head of insurance products at MLC, Sean McCormack, says super-based insurance is also cost-effective because you're paying for it with money that's been taxed at the 15 per cent super contributions rate rather than at a personal tax rate that could be as high as 45 per cent.

While this is a simple calculation when it comes to life insurance, Agranat notes that with income protection you're entitled to a tax deduction on a private policy anyway.

While Agranat believes the pros often outweigh the cons, he nevertheless cautions that the disadvantages need to be considered. The main one is an added layer of complexity in the event you need to make a claim.

Not only do you need to satisfy the insurer to receive a payout, you also need to satisfy the trustee of the super fund. “You're not actually paid the benefit, technically, directly – it goes via the trustee and you have to meet a condition of release,” Agranat says.

Staunton, of AustralianSuper, says it's true the trustee has to make its own judgments. But the conditions of release have been in place for a long time.

“Ask me whether I'd prefer to be insured inside super or outside super and, without a doubt, I'd rather be insured through a super fund," he says. "The bottom line is you've got a large, independent party acting for you that carries a lot of commercial clout. If you're an individual versus an insurance company, that's not there.”

Agranat says people need to compare the terms and conditions of the policies on offer from their super fund with those available outside.

The AustralianSuper cover, for instance, stops payouts after two years, when Agranat argues it's better to have an income that lasts to age 65 even if you do receive a lump sum for permanent disability at some point.

Then again, the fund's plan builds in super contributions, when many others do not.

Agranat says people also need to know whether there's an option to continue the cover in a private capacity should they leave the super fund or a particular occupation and on what terms and conditions.

Plug the savings gap

Paying your premiums via super may be cost-effective but Centric Wealth risk specialist Roy Agranat is concerned people don't appreciate the impact on retirement savings.

“Your super fund is being reduced by the cost of the insurance. It's a bit 'smoke and mirrors' to say you're not paying out of your own pocket when in reality you're paying out of your retirement money," he says.

“There's substantial funding of insurance — life and now income protection — going on and it's whittling away at retirement savings. The 9 per cent isn't enough anyway, so imagine what it's doing to that. And as you get older, it gets more expensive. At least consider salary sacrificing the cost of the premiums back into the fund.”

Key points

Super-based insurance is cost-effective.

Avoid loadings and exclusions because of pre-existing conditions.

The claim has to get a tick of approval from the fund trustee as well as the insurer.

Premiums will erode your retirement savings.