More and more superannuation funds are offering income protection (IP) cover as a way of differentiating their products, and members stand to gain several advantages over retail policies, including lower cost and greater eligibility.

TAL head of customer solutions Sean Williamson said greater competition was forcing super funds to offer IP as a way of differentiating their offerings. Innovation too in the IP cover space is also driving the trend, with much greater variation in policies possible compared to life insurance.

"We're seeing a lot more innovation in this space and there is a lot more variation among funds as to what they are offering in terms of the cost and design of products. We'll see a lot more of that going forward," Williamson said.

There are two types of income protection, agreed-value or indemnity policies.

Cover through super funds is generally limited to indemnity cover, that is, a person receives a benefit set as a proportion of their pre-disability salary, typically 75 per cent. 

The benefit period is usually restricted to two years. That compared to retail policies which could provide income protection up to the age of 65 as well as agreed-value cover, MLC general manager of group insurance Megan Beer said.

"Benefits are more standard in policies offered through super, while in retail policies, there are more 'bells and whistles' and you may be able to choose what type of cover you want. But in a super fund, everyone generally tends to have one type of cover," Beer said. 

However, CommInsure head of industry funds Frank Crapis said super funds were increasingly varying their IP offer depending on members' needs.

"This is seen as an area that funds can differentiate themselves, such as through offering short or long-term policies and different waiting periods," Crapis said.

"Some funds are looking at income replacement ratios of up to 99 per cent. This may be considered an expensive product as such members are less likely to go back to work. Other funds look to the more traditional 75 per cent ratio, akin to retail policies. Others even go as low as 35 or 40 per cent, where affordability is of greater concern to members."

Another trend is that certain groups previously excluded from IP policies are now increasingly able to gain coverage.

"What we're seeing is that funds are looking to remove those restrictions so that all members are eligible for IP cover, so that contract or casual employees are covered. Generally, big multi-sector funds are trying to push this through," Williamson said.

"This is another advantage over retail policies."

As a result of people working for longer, some funds are also offering IP insurance to those aged over 65, though benefits are typically restricted to one year. "Costs do rise a fair bit and we need more people to buy more of it, which would make the costs more affordable," Beer said.

The cost of IP cover gained through super is generally less than retail policies, though there are fewer choices on what benefits will be received.

"It's generally advantageous to buy income protection through a group insurance environment and that's largely because there's a lower cost of administration for insurers as policies are sold through bulk distribution," Beer said.

Coming superannuation changes may, however, impact on insurance offerings. Under Stronger Super changes, super fund trustees will have to balance the insurance needs of their members against the adequacy of their retirement savings. That might force a rethink on how much insurance was offered, Beer said.

"Trustees will need to consider the adequacy of retirement savings and weigh that against the suitability of insurance cover. There is a trade-off between the two," she said. 

Also under the Stronger Super proposals, self-managed super funds (SMSF) will be required to take into consideration the IP needs of its members.

"Thus, we will likely see not only more death and TPD (total and permanent disability) policies through super, but also more income protection policies being sold to the 800,000 SMSF members," Crapis said.

In terms of developing and implementing IP cover, there are more factors to consider, both from a product and operational perspective, than when just life cover is offered.

Where indemnity cover is offered, for example, employers keep an employee's salary up to date with the insurer. Where unitised or fixed-benefit cover was available, such a system was typically easier to administer, Williamson said.

"Such a system is easier to administer with fewer operational issues, but it doesn't keep in line with an employee's salary level and it may introduce over or underinsurance as cover isn't directly correlated with salary level," he said.

"Consideration also needs to be given towards contribution caps, with premiums paid by employers counting towards this cap."

He said trustees needed to balance many factors, and Stronger Super reforms would bring those into the spotlight.