Income Protection Inside Your Super: The Cover You Already Have

We’re Maciej Stanek and Imran Amjad, the financial advisers at Véurr Financial Planning. The short answer: many super funds provide life and total and permanent disability (TPD) cover automatically to members aged 25 or over, and some provide income protection automatically too (Moneysmart, ASIC’s consumer site, sets out how this default cover works). It switched on when you joined the fund, and the premiums come out of your super balance rather than your pay — which is why so few people can describe what they hold. What matters is the waiting period, the benefit period, the disability definition and when the cover ends. In a Commonwealth or Defence scheme, the answers differ again.

What insurance sits inside super?

Most super funds — other than self-managed funds — offer three types of cover, defined by Moneysmart, ASIC’s consumer finance site, as:

• Life cover (death cover) pays a lump sum or income stream to your beneficiaries when you die or have a terminal illness.
• TPD cover pays a benefit if you become seriously disabled and you’re unlikely to work again.
• Income protection (salary continuance) pays a regular income for a set time if you can’t work due to illness or injury — two years, five years, or to a certain age.

Life and TPD generally switch on from age 25, for a set amount, usually with no medical checks. Income protection is automatic at some funds, optional at others. Nothing starts automatically below 25 or under a $6,000 balance unless you ask — or you work in a dangerous job.

How to check the insurance inside your super

Fifteen minutes, no adviser required:

1. Log in to your super account, or call the fund. Go to the insurance section of your online account rather than the balance. If you cannot find it, call the fund directly — they can tell you what cover is attached to your account today.
2. Read your annual statement and the product disclosure statement. The annual statement shows the cover attached to your account and the premiums deducted. The fund’s product disclosure statement explains who the insurer is, what is covered, the exclusions and the claim rules.
3. Write down four numbers. What type of cover you have — life, TPD, income protection, or a combination. How much cover you have. How much you are paying in premiums. And when the cover ends, or when it can be cancelled.
4. Check the income and occupation the fund has on record. Income protection benefits are calculated on the income the fund holds for you, not the income you earn today. Check the figure and check whether you have been classified as a smoker or a higher-risk occupation — an incorrect classification means you are paying more than you need to.
5. Check whether you have more than one super account. If you hold several accounts you may be paying premiums on several policies, which reduces your retirement savings. Depending on the policies, you may not be able to claim the full benefit from more than one.

Where default cover in super commonly falls short

Default cover isn’t bad cover — it’s cover designed for an average member, who is nobody in particular. These are the points where the gap between “I’m insured” and “I’m covered” opens up:

Tax and cash flow: inside super versus outside

Premiums. The ATO allows a deduction for premiums you pay to protect your salary and wages — income protection, or continuing salary cover. You can’t claim it where the policy is through your super fund and the premiums are deducted from your contributions. Life, trauma and critical-care premiums aren’t deductible at all, nor is any part of a policy paying a capital sum to compensate you for injury. Inside super the premium leaves your retirement balance; outside, it leaves household cash flow. Neither is free.

Benefits. Income protection is straightforward: a payment that replaces your salary and wages is assessable income, whether it arrives as regular payments or a lump sum. A TPD benefit paid from super is anything but straightforward — the tax outcome moves with your age, the components of the benefit (including the untaxed elements common in public-sector funds, which makes this a live issue in Canberra), and whether you take a lump sum or a pension. Two people with the same diagnosis and the same cover can face very different tax bills depending on how and when the benefit is taken. This is one of the places where getting advice before electing how to receive a benefit genuinely changes the outcome.

Access. Insurance inside super is paid into super first, so you also need a condition of release: permanent incapacity, where you’re unlikely to work again in a role you’re reasonably qualified for by education, training or experience; or temporary incapacity, which is what lets income protection in super pay while you can’t work for a period. Cover outside super has no such gate — one reason households able to fund premiums personally often hold part of their cover there. That question is worked through in our income protection guide for higher income earners.

Can TPD cover be split between inside and outside super?

Sometimes it doesn’t have to be an either/or. TPD cover can be structured as split cover: one policy built as two linked components — a larger component owned and paid for by your super fund, and a smaller component owned by you personally and paid from your own money. Each side does a different job.

• The super-owned component does the heavy lifting on cost. Its premiums come out of your super balance rather than household cash flow, and the ATO allows a complying super fund to claim a tax deduction for the premiums it pays on death and TPD cover. Super is a concessionally taxed environment — fund income is generally taxed at 15% — so that deduction can be worth up to 15% of this component’s premium, where the fund passes the saving back to your account.
• The personally-owned component is the flexible one. Cover in your own name can carry broader definitions — including own-occupation TPD, which is usually only available outside super — and a benefit is paid directly to you. A lump sum from a policy you own personally is generally received tax-free.
• At claim time, the two components face different gates. The super-owned component has to clear both the insurer’s TPD definition and the stricter second gate described above — the permanent incapacity condition of release under superannuation law — before anything can leave super. The personally-owned component only has to satisfy the insurer’s definition, so it can respond in situations where the super-owned side cannot.

Split cover isn’t automatically better. The right mix depends on your fund, your cash flow, your occupation and health, and the definitions on offer. This is a structuring choice to weigh with an adviser rather than a DIY exercise — and exactly the kind of question a first meeting is for.

What’s different for Commonwealth and Defence scheme members

This is where Canberra stops looking like the rest of the country. If your fund is a Commonwealth Superannuation Corporation (CSC) scheme, “insurance in super” means something different, and the answers on a general comparison site won’t apply to you.

PSSap

PSSap is closest to the standard model: most new customers are eligible for Income Protection and Death and TPD cover through lifePLUS auto on joining — no forms, no medicals. The published auto income protection settings aren’t obvious, and they matter:

• A 90-day waiting period at every age band. Manageable with a healthy sick-leave balance; a long time without one.
• A benefit payment period of two years for ages 14 years 9 months to 34, five years for ages 35 to 54, and two years again from 55.
• A benefit of 75% of base salary plus 15.4% super contributions — 90.4% in total — dropping to 50% plus contributions for the last three years of the 35–54 band. Maximum monthly benefit $15,000.
• Payments based on the lower of your actual income at the time of total disability and the income PSSap was told about. Where CSC hasn’t been advised, it assumes $47,000 — far below most APS salaries.
• Auto cover runs to under 67 for Income Protection and under 65 for Death and TPD. Under-25s, members 25 or over with balances under $6,000, and casuals of any age must opt in — within 60 days of the welcome experience and 180 days of starting with the employer.

CSS and PSS

The closed defined benefit schemes work differently. Members automatically receive Death and Invalidity benefits at no extra cost — scheme benefits assessed by CSC, not an insurance policy. For a contributing CSS member under 65 the invalidity benefit is calculated as if you had worked to 65; for a contributing PSS member under 60, on the lump sum you’d have received working to 60 as a full benefits customer. Both also pay a partial invalidity pension where a medical condition permanently cuts your salary through a downgrade or reduced hours, plus pre-assessment payments after sick leave runs out.

• There is no income protection inside CSS or PSS. The only route to income protection, or to Death and TPD insurance, is joining PSSap as an Ancillary customer and applying through lifePLUS choice — under 67 for income protection, under 70 for Death and TPD.
• PSS members can top up through ADIC. Additional Death and Invalidity Cover is open to contributing PSS members under 60, and the employer pays half the standard risk premium. It works like buying an extra Accrued Benefit Multiple used only on death or invalidity retirement — which suits members who joined or rejoined later with a short prospective service period to 60.

ADF Super, ADF Cover and the transition out

Serving members who are ADF Super customers — or who have their 16.4% employer contributions paid elsewhere — get Death and Invalidity benefits automatically through ADF Cover at no extra cost, if they’re permanent forces or continuous full-time reservists and under 60. Invalidity benefits are generally paid as a pension, assessed by CSC on your incapacity for future civilian employment.

What catches people is the way out. After you leave the ADF, lifePLUS Protect auto can start the day after — but it’s Death and TPD cover only. Income protection must be applied for separately through lifePLUS Protect choice, so a member who assumes the cover carried across can find that layer was never there.

For DFRDB and MilitarySuper members, and how invalidity and TPD claims interact with DVA, our TPD and invalidity guide for Defence members goes deeper. For CSS, PSS and PSSap decisions more broadly, see financial planning for Australian public servants.

When it’s worth getting advice

Checking the cover is a job you can do yourself — the five steps above are the whole job. Advice earns its keep on the next question: whether what you found fits your household, what changing it costs, and what you’d give up in retirement savings to do it. That gets harder with a defined benefit scheme, because the invalidity benefit behind CSS, PSS, DFRDB or MilitarySuper isn’t a policy you can line up on a comparison table. The usual prompts: a mortgage or a new child, a move between schemes, a redundancy or medical transition out of the ADF, or an inactive-account notice.

Common questions about insurance in super