Salary Continuance Insurance: How It Affects Your Gross Pay, Super, and Tax
Understand salary continuance insurance (SCI) – how it replaces income, its tax treatment, and the impact on your super and take-home pay.
Salary continuance insurance typically replaces up to 75% of pre-disability income; the benefit is assessable income and premiums may be deductible depending on the policy.
What Is Salary Continuance Insurance?
Salary continuance insurance (SCI) is a type of income protection that pays you a regular monthly income if you cannot work because of illness or injury. It is also called income protection insurance or salary continuance cover. The benefit typically replaces up to 75% of your pre-disability salary for a set period – often two years, five years, or until a certain age. For example, the Government Employees Superannuation Board (GESB) describes SCI as providing a monthly income of up to the lesser of your amount insured and 75% of your pre-disability annual income for up to two years.
SCI is designed to protect your gross pay when you are unable to earn it. Without it, you would rely on sick leave, savings, or government support. Understanding how SCI interacts with your gross pay, superannuation, and tax is essential for making informed decisions.
How Salary Continuance Insurance Relates to Gross Pay
Your gross pay is your total earnings before tax and other deductions. SCI aims to replace a portion of that gross pay. The national benchmark for full-time adult ordinary-time earnings is $108,352 per year (index 100 on the Salary Index). If you earn $100,000 (index 92.3), a typical SCI policy covering 75% would pay $75,000 per year while you are unable to work. That $75,000 is still assessable income, so you will pay tax on it. The net amount you receive after tax depends on your marginal rate and the tax-free threshold.
Because the benefit is a percentage of your salary, your SCI coverage is directly tied to your gross pay. If your salary increases, you may need to update your policy to maintain adequate cover. Conversely, if your salary is below the national average, your benefit will be lower. For example, someone on the national minimum wage of $52,255 per year (index 48.2) might have a SCI benefit of around $39,191 per year (75% of $52,255), which is an index of about 36.2.
Salary Continuance Insurance and Superannuation
Many Australians hold SCI through their super fund. Most super funds offer income protection as an optional or default insurance. The premiums are deducted from your super balance, which means you do not pay them from your take-home pay. However, this reduces your retirement savings over time. As [Moneysmart explains, insurance through super can be cheaper because super funds buy cover in bulk, and you may not need medical checks for default cover without medical checks. But there are drawbacks: default cover may not suit you, and cover can end if your account becomes inactive or your balance is too low.
Paying premiums through super can be tax-effective. Super contributions are taxed at up to 15%, whereas if you pay premiums from after-tax income, you can claim a tax deduction. For someone on a 30% marginal rate, the deduction effectively reduces the cost. But if you pay through super, you lose the deduction and the premiums reduce your super balance, which could matter more if you are close to retirement.
If you have multiple super accounts, you may be paying premiums on more than one SCI policy. This reduces your retirement savings and you may not be able to claim the full benefit from more than one policy. It is worth reviewing your insurance across all accounts and consolidating if needed.
Tax Treatment of Salary Continuance Insurance
The Australian Taxation Office (ATO) provides clear guidance on the tax treatment of income protection insurance. Premiums are deductible if the policy covers loss of income (salary and wages). You cannot claim a deduction if the policy pays a capital sum for injury or total and permanent disability, or if it is through your super fund and the premiums are deducted from your contributions.
Example from the ATO: Deanne pays $250 a month for a combined income protection and personal injury policy. $175 is for income protection cover and $75 for personal injury cover. She can claim $175 per month as a deduction; the $75 is not deductible because it is capital in nature.
If you receive a payment under a SCI policy to replace your salary, you must include it in your tax return. This is the case whether you receive regular payments or a lump sum. If the payment is for personal injury or total and permanent disability, it may be treated as a capital gain and assessed under capital gains tax rules.
For policies held outside super, the deduction for premiums reduces your taxable income. For example, if you earn $100,000 and pay $2,000 in SCI premiums, your taxable income drops to $98,000. The benefit, if claimed, is added to your income. So the net effect is that the premium is effectively tax-free (because you get a deduction) and the benefit is taxed as income.
Practical Considerations
When choosing SCI, consider your industry and state. For instance, the industries page shows that mining has an average index of 154.7, while retail trade is 75.9. A higher earner in mining may need a higher benefit amount, but also may have access to different policy terms. Similarly, state differences matter: Western Australia has an index of 106.9, while Tasmania is 88.6. Your cost of living and income level will influence how much cover you need.
Also, remember that SCI is not the same as total and permanent disability (TPD) insurance. TPD pays a lump sum if you are unlikely to work again, while SCI provides ongoing income for a limited period. Many super funds automatically include life and TPD cover but not SCI. Check your [super fund's product disclosure statement (PDS) to see what cover you have.
Finally, the super guarantee rate is 12% from 1 July 2026, with a maximum contribution base of $270,830. If you pay SCI premiums from your super, they reduce the amount going to your retirement savings. Weigh the benefit of having cover against the long-term cost to your super balance.
Summary
Salary continuance insurance is a valuable tool to protect your gross pay when you cannot work. It replaces up to 75% of your income, and the benefit is assessable. Premiums are tax-deductible if the policy covers income loss and is held outside super. Inside super, premiums are paid from pre-tax contributions but reduce your retirement savings. Understanding these interactions helps you choose the right cover for your situation. For more on how pay compares nationally, see how the index works and explore related topics.
Questions people ask
Is salary continuance insurance tax-deductible?
Yes, if the policy covers loss of income (salary and wages) and is held outside super. Premiums for income protection are deductible under section 8-1 of the Income Tax Assessment Act. However, premiums for policies that pay a capital sum for injury or total and permanent disability are not deductible. If the policy is through super and premiums are deducted from your super contributions, you cannot claim a deduction.
How is a salary continuance insurance benefit taxed?
If you receive a regular payment under a salary continuance policy to replace your salary or wages, you must include it in your tax return as assessable income. This applies whether the policy is held inside or outside super. If the payment is a lump sum for personal injury or total and permanent disability, it may be treated as a capital gain and assessed differently. Always check with the ATO or a tax professional.
Should I get salary continuance insurance through super or outside?
It depends on your circumstances. Through super, premiums are deducted from your super balance, which can be tax-effective (since contributions are taxed at up to 15%) and you may not need medical checks for default cover. However, it reduces your retirement savings and cover may end if your account becomes inactive. Outside super, you pay premiums from after-tax income but can claim a tax deduction, and the cover is generally more flexible. Compare costs, benefits, and your personal needs before deciding.