Protecting Your Income: What’s The Difference Between Salary Continuance And Income Protection Insurance?

What is salary continuance insurance?

Put simply, the term salary continuance insurance is used to describe income protection cover held within a super fund. This means you pay insurance premiums out of your super balance rather than paying an insurer directly. It also means that in the event of a claim, any benefits will firstly be paid to your super fund before being released to you, provided you meet certain conditions.

Both salary continuance and income protection insurance are designed to provide a stream of income if you can’t work due to certain reasons, like injury or illness. Despite sharing the same overall purpose, the two insurance types have a few major differences.

What’s the difference between salary continuance insurance & income protection insurance?

Generally, both salary continuance and income protection insurance will pay up to 75% or so of your regular salary if you’re unable to work due to injury or sickness. However, this is usually subject to certain monetary caps. To receive benefit payments, insurers will typically require you to be totally or partially disabled or have a specific injury or sickness that renders you unable to work. The main difference between the two insurance types is that salary continuance is typically only available through a super fund.

Benefit payments for salary continuance insurance

Benefit payments are usually made monthly and will start at the end of your waiting period, which is often between 30 to 90 days. For salary continuance policies, the benefit period – the maximum amount of time you can receive benefit payments – will typically be two or three years, depending on the provider. Benefits will stop at the end of the benefit period, even if you’re still unable to work.

There are a number of circumstances where payments will stop before the end of the benefit period. For example, if you:

• Are no longer injured or sick
• Return to work
• Stop being under medical care
• Reach the benefit expiry age or retirement age as specified by your policy (usually this is 60 or 65 years)
• Pass away

Tax on salary continuance insurance

According to the Australian Taxation Office (ATO), salary continuance premiums are not tax deductible for individuals. The ATO says salary continuance cover is only tax deductible to the super fund. 

Potential pros and cons of salary continuance insurance

Pros:

• May have less of an impact on cash flow as premiums are deducted directly from your super balance.
• Premiums may be cheaper than standalone policies because super funds tend to buy policies in bulk.
• Some funds may automatically accept you for cover without requiring a health check.

Cons:

• Premiums are not tax deductible, according to the ATO.
• As a group policy, that is a single contract covering a group of people, the benefits and features of salary continuance cover may be limited and may not provide enough cover for your individual circumstances.
• There may be delays in receiving benefits because the insurer pays the benefit to the super fund, which then pays the benefit to you.
• If you change super funds, your super contributions stop or your account balance falls below a certain amount, your insurance cover may stop and you could be left uninsured. 

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What is income protection insurance?

In comparison to salary continuance insurance, income protection insurance can generally be held either inside or outside super. And while income protection insurance through your super would work in the same way as salary continuance insurance, let’s look at how income protection policies held outside of super differ.

Unlike salary continuance which is usually purchased in bulk for a group of super fund members, income protection insurance outside of super is designed to be more tailored to the individual policyholder. For example, if you take out an income protection policy you may be able to choose the waiting period and payment frequency. Keep in mind that the longer the waiting period you choose, the lower the premium you will generally pay.

In addition, there may be more inclusions and options offered. For example, features such as rehabilitation benefits, accommodation benefits and homemaker benefits are often only available in policies outside of super.

Benefit payments for income protection outside of super

Income protection policies often come with the option to select a defined benefit period, or to request that benefits continue to be paid until you turn 70 years old. This is in contrast to salary continuance, which usually has a maximum benefit period of two or three years, depending on the provider.

Tax on income protection outside of super

According to the ATO, premiums for loss of income are tax deductible. The ATO advises that you must include any payment you receive on your tax return.

Potential pros and cons of income protection outside of super

Pros:

• Flexibility to tailor your cover to suit your individual circumstances.
• Flexibility to choose your waiting period.
• Tax deductible, according to the ATO.
• Shorter waiting periods compared to most super funds. Payments for specific injuries or illnesses can be made with no waiting period or requirement to have time off work.
• Some income protection insurance providers may allow you to extend your cover to give you some short-term financial assistance in case you become involuntarily unemployed. This option is typically not available under salary continuance policies.

Cons:

• Compared to salary continuance insurance purchased in bulk, income protection insurance purchased at an individual level outside of super may be more expensive.
• May have an impact on cash flow as premiums are paid with post-tax money.
• May be more difficult to get if you have a pre-existing condition.

Considering taking out an income protection insurance policy outside of your super? The table below displays a snapshot of direct income protection policies on Canstar’s database sorted by Star Rating then provider name (alphabetically). These results are based on a 30-39 year-old non-smoking female working in an administrative role. Check upfront with your provider and read the PDS to confirm the details of a particular policy, and whether it meets your needs, before deciding to commit to it.

To compare more income protection policies, please click here.

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Salary continuance vs income protection insurance

Here’s a round up of some of the key differences between salary continuance and income protection insurance:

Split income protection

Some providers also offer split income protection – where income protection is divided up inside and outside of super. This allows you to pay part of your overall premiums via your super account while also having access to the features that are available for insurance outside of super. It could be worth contacting your insurer if this is an option that appeals to you.