Member value: Income protection in superannuation

However, while IP offsets assist with ensuring cover is sustainable, they also pose potential challenges for superannuation funds and their members. This paper discusses:

• the purpose of IP offsets in superannuation
• the outcomes for members
• some of the factors that may be considered when deciding a suitable offset design, ways to manage the chosen design and understand potential issues that may arise with offsets.

IP cover within superannuation is indemnity cover, designed to replace a substantial portion of a member's lost income if they become disabled.

IP offsets in superannuation refer to a provision in superannuation funds' IP policies that allows the insurer to reduce the amount of IP benefit payable to the member by taking account of the amount of other disability income the member may be receiving during their period of disability.

Where the member received other disability income support as well as the income from the IP cover provided by the fund, a limit is applied to the total income the member may receive so the member does not receive more while disabled than they earned while working and ideally a financial incentive remains for the disabled member to return to work. The calculation is usually made with each monthly IP benefit payment.

IP designs where the insured member receives more income while disabled than they did before they were disabled are unsuitable, as there is a financial penalty for the member if they return to work. Premiums under this design will be substantially higher and likely continually increase, compared with a design where there is no financial disincentive to return to work.