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Income Replacement Insurance

Comparing Income Protection Insurance with Salary Continuance Insurance

Income Protection insurance is the more common name for this particular life insurance product, but when it is held within a superannuation account, is sometimes referred to as Salary Continuance insurance. In the latter case (held in superannuation), there are often different definitions that apply – and any claim needs to be processed through the superannuation trustee, who will collect any claim proceeds and pass them on if eligible.

Why do we need to compare these two lines of income replacement insurance?

As part of the strategy to protect the first line of wealth accumulation and lifestyle preservation, income-earners have available income replacement insurance products that will replace a substantial portion of their income in the event of their being unable to continue to undertake productive work because of certain incapacities or disabilities.

The two most broadly applicable products are Income Protection Insurance (available to any person deriving an income from personal exertion); and Salary Continuance Insurance (available to a broad spectrum of employees as members of particular superannuation funds). There is a considerable overlap of people eligible for either of the two products. Deciding which one is most appropriate in any individual circumstance, is the question we seek to guide you to be able to resolve.

What are the main differences between these two policy types?

There are a number of differences between the two types of insurance policy that provide financial protection in the form of income replacement benefit payable on a monthly basis. The following table details a number of those differences (you may wish to rate the features in some way to help you decide which policy type can meet your need):

Salary Continuance Insurance Income Protection Insurance
Access to cover This form of income replacement insurance is only available within a superannuation account. If you do not have a super account, salary continuance insurance will not be available to you. Most commonly owned as a stand-alone income replacement policy; however, options exist to have ‘limited’ cover inside your super fund with premium payments being drawn from the accumulating balance in your super account.
Claims definition(s) The definition of an inability to continue to earn income so as to be eligible to claim under the policy is strictly limited to what is known as ‘any occupation’ (^see generic definitions below this Table): the nature of this insurance means that the trustee of the fund has control as to the definition applicable to the protection offered to its members. The definition of an inability to continue to earn income so as to be eligible to claim under the policy is optional as between the ‘any occupation’ and the ‘own occupation’ definition for most insured people (^see generic definitions below this Table).Only the insurer can vary the definition terms once the contract is in place – and then only with the consent of the insured person.
Medical exam requirement Neither blood tests, medical examinations nor completion of personal health statements is required for this type of cover. At the discretion of the proposed insurer completion of a personal health statement, and undertaking blood tests and medical exams may be required (albeit often at the cost of the insurer.
Conditions of cover Often referred to as ‘vanilla protection’, features and benefits of this type of policy are limited by comparison with the IP Insurance policy. A broad range of features and benefits may be available within various occupation code constraints; and can be tailored to individual needs and preferences.
Assistance if ‘between income roles’ Salary continuance insurance does not provide coverage for involuntary unemployment – and indeed is at risk of being cancelled if there is a period on non-contribution to the super account in which it is held. Income protection insurance does not provide a benefit in an involuntary unemployment situation; however, some insurers may provide a level of ‘assistance’ by freezing your cover or waiving your premiums. Even if partly held in a super account, the cover may be able to continue in spite of the absence of ‘current’ contributions.
Benefit period Most salary continuance insurance providers only provide benefit payments for a maximum term of two years from first becoming eligible in any one claim event. Most income protection insurance policies provide a menu of benefit periods from which the insured can choose one that is most suitable to personal needs and circumstances: these range from 2 to 5 years, or up until the age of 65 (and in some recent offerings, beyond that age).
Premium rates Because the companies offering salary continuance insurance provide the cover either through employers or through super fund trustees, the premiums tend to be lower reflecting the broader base of lives covered – and the volume of the business involved. Income protection insurance premiums are likely to cost more because these policies provide more comprehensive cover through a wide range of features and additional options that can be tailor-made to suit individual circumstances.
Future insurability If cover is provided under group salary continuance insurance through your employer, it will cease if you change your employer. Cover will continue provided that premium payments are met by the sponsoring employer. For as long as the premium payments are met under the terms of the policy, you will continue to be insured, regardless of any changes in your health or employment status.
Premium type Salary continuance insurance is only issued under conditions of a stepped premium. In this situation, the annual cost of cover increases (relative to the amount of the cover provided) with the age of the insured. Income protection insurance within superannuation is only available with stepped premium conditions: however, any such insurance (even where there is a split-linked policy with super cover) outside of superannuation may be able to be taken on what is termed level premiums. (Level premiums provide a constant level of cover at a premium cost that is unchanged relative to the cover provided.)

^Under the ‘Any Occupation’ definition, a claim will generally be paid if you’re unlikely to be able to work in any occupation that you are suited to by education, training or experience; whereas the ‘Own Occupation’ definition is satisfied when you’re unlikely to be able to perform key tasks in your current occupation.

Can I upgrade from Salary Continuance to Income Protection insurance at any time?

Whilst there may be some impediments to such a change with some employer arrangements (and in some occupation types), generally speaking it should be possible to replace Salary Continuance (SC) with Income Protection (IP) insurance. However, this will not be a transfer of the cover from the SC to IP, a new application and policy will be required. Dependent on the state of your health, an IP policy may not be available: accordingly it is always prudent to leave existing protective policies in place until the new cover is fully accepted.

In certain circumstances a more suitable solution may be to supplement the existing, low- or no-cost SC policy with an IP policy with which options have been selected to optimise the benefits of each of the policies.

When considering insurance within Super, the advice provided in the MoneySmart website on this topic is also helpful: it is linked here.

Trusted advice about income replacement insurance –

Income replacement insurance offered in either Salary Continuance or Income Protection policies is a key element of wealth management strategies used to provide financial security and certainty for the accumulation phase of financial planning. In this context it is important to consider all relevant personal circumstances: and at Continuum Financial Planners Pty Ltd, we work to the mantra that – ‘we listen, we understand; and we have solutions’ to your personal and specific needs, that we deliver in personalised, professional wealth management advice.

To ensure that your best interests are provided for in these matters, contact our office (by phone to 07-34213456) or use our website to arrange a meeting with one of our experienced advisers.

Further information regarding income replacement insurance policies:

The Continuum Financial Planners Pty Ltd website carries a Library of articles on financial planning related topics: the Risk Insurance Strategies category in that Library includes the following articles relevant to this type of insurance –

Originally published in November 2014, this post has occasionally been refreshed/ updated, most recently in January 2021.

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