Income Protection Insurance Inside vs Outside Super — What’s the Difference?

When it comes to protecting your income, you might not realise you can hold income protection insurance either inside your superannuation or as a standalone policy outside of super. Both options have their benefits — but the right one for you will depend on your circumstances, preferences, and how you want to manage cash flow.

At Covermate Life, we explain these options in simple terms so you can make an informed decision that suits your situation.

A Quick Refresher: What Is Income Protection Insurance?

Income protection insurance provides regular monthly payments (usually up to 70% of your income) if you can’t work because of illness or injury. It helps cover essentials like:

• Mortgage or rent payments

• Groceries, bills, and transport

• School fees or household expenses

You can hold this cover in two ways — inside your super fund or outside of super with a personal policy.

Option 1: Income Protection Inside Super

Many Australians already have some form of income protection through their superannuation fund. This can be an easy, low-effort way to obtain cover — but it comes with certain limitations.

Advantages

• Simple and convenient: Premiums are automatically deducted from your super balance.

• No impact on take-home pay: You don’t need to budget for premiums from your salary.

• Basic default cover: Often included automatically when you join a fund (subject to eligibility).

Considerations

• Limited flexibility: Cover options, definitions of disability, and benefit periods may be restricted.

• Shorter benefit periods: Many super-based policies pay for only 2 years, compared to up to age 65 for standalone policies.

• No personal tax deduction: You can’t claim the premiums personally on your tax return.

• Possible reduction to retirement savings: Premiums come out of your super balance, slightly reducing long-term retirement funds.

Option 2: Income Protection Outside Super

A standalone policy is purchased directly from an insurer or through an adviser. This option generally offers greater flexibility and broader features.

Advantages

• More control: You can choose waiting periods, benefit periods, and policy definitions that suit your needs.

• Comprehensive features: Many policies include rehabilitation support and optional extras.

• Tax-deductible premiums: Premiums are usually tax-deductible because the cover replaces your taxable income.

• Personal ownership: You keep the policy even if you change jobs or super funds.

Considerations

• Affects cash flow: Premiums are paid from your after-tax income.

• Higher cost: Standalone policies can cost more due to wider coverage and flexibility.

• Requires active management: You’ll need to keep payments and policy details up to date yourself.

Comparison at a Glance

Feature	Inside Super	Outside Super
Premium payment	Deducted from super balance	Paid from personal income
Tax deduction	Not personally deductible	Generally tax-deductible
Benefit flexibility	Limited options	Greater flexibility
Benefit period	Often 2 years	Up to age 65 (varies)
Definitions of disability	Simpler, may be restrictive	More comprehensive
Portability	Linked to super fund	Independent of super fund
Impact on retirement savings	Reduces balance slightly	No impact

Which Option Is Right for You?

There’s no one-size-fits-all answer. It depends on your cash flow, occupation, and financial goals.Some people even combine both — holding a base level of cover through super and an additional policy outside super for more comprehensive protection.

At Covermate Life, we can help you understand the general differences between these options so you can make an informed decision.

We provide general product information only — not personal financial advice.If you’d like to determine which approach is best for your specific circumstances, consider speaking with a licensed financial adviser.

Key Takeaway

Income protection inside super offers convenience and simplicity, while outside-super policies provide greater flexibility and potential tax benefits.

Understanding how each structure works can help you choose cover that fits your lifestyle, budget, and long-term financial goals.

Important Information

This information is of a general nature only and does not consider your personal objectives, financial situation, or needs. Before making any decisions, read the relevant Product Disclosure Statement (PDS) and consider seeking advice from a licensed financial adviser or tax professional.

Talk to Covermate Life

Want to understand how income protection works inside or outside super? Get a quote today.