Is insurance inside super a rip-off?
Many Australians* don't realise that their super fund usually includes some level of insurance to cover you in events like:
- Death (pays to your loved ones)
- Injury and illness
- Total and permanent disablement
Your included insurance through super is taken out as a "group" policy which enables you to pay a premium that's standard for all members.
While super insurance sounds affordable, there are many limitations which make it less worth it for some policyholders (while there are benefits that make it more worth it for others).
Compare your insurance options
What are the pros or cons of superannuation life insurance?
While it's convenient to use the policy that's included with super, there may be a standalone policy that's more suitable for your needs. It's worth reviewing the benefits and drawbacks of cover inside super:
Inside super: The good
Inside super: The good- It's usually cheaper
- Reduced medical exam requirements
- Pre-existing medical conditions may be covered
Inside super: The not so good
Inside super: The not so good- Harder to prove disability
- The amount of cover may not be what you need
- Reduces your final super balance
*In a recent study of 1,500 superannuation members, finder.com.au found that 1 in 5 members did not realise their fund included insurance.
How much is my super balance affected by insurance?
A downside of paying for insurance inside super is that your super balance is reduced, but by how much exactly? SelectingSuper published a list of the top 10 performing funds in the last 20 years. We broke down the costs of insurance included with each of these funds to work out how much more you could have over 20 years if you opted-out of insurance.
This calculation is a general indicator of how much more you could earn by opting out of super insurance cover. This analysis was completed in February 2019. Your balance may be impacted by the actual return your super fund achieves that year, how often a super fund accrues interest on your investment and the cost of your actual insurance cover based on your personal situation.
| Fund | Investment return (pa.) | Balance after 20 years (with insurance) | Balance after 20 years (if opted out of insurance) | Extra balance |
|---|---|---|---|---|
| CareSuper | 8.3% | $461,027.02 | $481,507.75 | $20,480.73 |
| Hostplus | 8.2% | $466,906.23 | $476,482.38 | $9,576.15 |
| RestSuper | 8.0% | $439,078.98 | $466,618.67 | $27,539.70 |
| EquipSuper | 8.0% | $422,280.74 | $466,618.67 | $44,337.93 |
| AustralianSuper | 8.0% | $454,778.53 | $466,618.67 | $11,840.14 |
| UniSuper | 7.7% | $442,555.75 | $466,618.67 | $24,062.92 |
| AustSafe Super (Sunsuper) | 7.7% | $456,129.76 | $466,618.67 | $10,488.91 |
| BUSSQ MySuper | 7.6% | $420,589.53 | $447,096.84 | $26,507.31 |
| Cbus Industry Super | 7.6% | $418,831.59 | $466,618.67 | $47,787.08 |
| HESTA | 7.6% | $438,619.15 | $447,616.60 | $8,997.45 |
Compare the cost of super inside insurance
Life insurance inside vs outside super
Here are the key differences between life insurance inside and outside of super:
 Inside super |
 Outside super |
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|---|---|---|
| Premiums deducted automatically? |
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| Eats into your super balance? |
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| Benefits are paid out to the person you name on your policy? |
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| Is automatically renewed? |
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| Can my life insurance be tailored? |
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| Pre-existing medical conditions automatically covered? |
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Should I cancel my super insurance?
Not so fast:
- Don't rush to cancel cover inside your super fund. If you have a medical condition or a dangerous job, a default super insurance plan might cover you automatically and help out with your claim if you're forced out of work at some point. If you cancel and reapply for cover later on, you most likely won't be covered.
Instead:
- Consider your life stages and what you need. For instance, if you are young and have no dependants you won't have much use for death insurance but you may need to consider income protection. Decide what you need covered and how much.
- Keep cover, modify or cancel. Keep cover if it's suitable for your situation. Choose between super insurance or standalone cover. Cancel if you really have no need for it.
- Review regularly. Your life insurance needs in five years will be different to what they are now.
Multiple super accounts
According to the ATO (Australian Taxation Office), roughly 39% of Aussies have more than one super account. If this is you, there's a chance you have more than one insurance policy, which is in most cases useless. Be sure to review these policies and consolidate super where possible.
Insurance comparisons inside and outside super
What's the best superannuation life insurance policy on the market?
The Australian Financial Review's annual Blue Ribbon Awards identified the best life insurance policies inside superannuation. Some of the main criteria assessed included lump sum amounts, wide range of features and long expiry age.
The best term and TPD life insurance of 2016
| Policy | Award | Product details |
|---|---|---|
| MLC Life Cover with TPD Rider | Best policy | Wide range of features including accidental injury and guaranteed future insurability. Expiry age of 100 with clear pricing for all ages and occupations |
| TAL Accelerated Protection | Highly commendable | Option to buy back your life insurance cover in the event of a TPD claim and premium freeze benefits |
| AIA Priority Protection | Highly commendable | Unlimited cover for certain occupational categories and a funeral advancement amount up to $25,000 |
We also recommend reading these guides
Super life insurance: Why you should review it regularly
Default life insurance through super can be a blessing or a curse, depending on whether you need it and how much it’s reducing your nest egg. Find out here why you should be reviewing your policy. Read more…
Insurance Through Super: Nine things you need to know
You might have insurance inside your super but what should you do with it? Here's 9 things to know. Read more…
In-depth guide to superannuation cover
How does superannuation insurance work?
Here's a run-down of how it works.
What's it for?
Insurance gives you peace of mind as it provides financial support if you die or need to stop work due to injury or illness.
How do you pay?
Cover is usually automatically included when you join a super fund and fees are deducted from your super.
What if I stop contributing to super?
If you or your employer stop making contributions, insurance fees will still be deducted from your super balance.
Can I cancel or change my insurance?
Yes you can. Just get in touch with your super fund or check your super's online platform.
The four types of insurance available in super
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|---|---|---|---|---|
| Pays if... | Pays if you're likely to die within 24 months | Pays to your family, dependants or estate if you die | Pays if you're unlikely to ever work again due to illness or injury | Replaces part of your income for a short period if you're unable to work (temporarily) due to illness or injury |
| Automatic cover | Yes | Yes | Yes | Yes |
| Cover usually ends at age | 75 | 75 | 65 | 65 |
| Pre-existing medical conditions: Are they covered? | Yes | Yes | Yes | Yes |
| Does your employment status at the date of an injury affect your cover? | No | No | Yes | Yes |
| Are you covered if a claim has been paid in the past under the same type of cover? | No | Not available | No | Yes |
| Is there a waiting period before claims can be made? | No | No | Yes | Yes |
*Active employment. This means your ability to perform the duties of your normal job in a full-time capacity when your cover starts.
Can I choose where a death benefit goes?
- Yes, but you will need to choose beneficiary that is a "binding" nomination.
The cost of cover or amount of cover can change as you get older
The cost of life insurance inside a retail superannuation fund will often change based on your age. The older you are the more expensive it gets. The cost is also affected by the way you pay for cover.
Unit-based vs fixed
You can often choose between two types of payments: unit-based cover or fixed cover.
- Unit-based cover: The cost stays the same but your cover decreases as you get older.
- Fixed cover: Your cover stays the same, but your costs increase with age.
Learn more about unit-based and fixed costs
Note: Superannuation life insurance will typically start off as unit-based cover, which you can then switch to fixed cover if needed.
What types of superannuation funds offer life insurance?
1. Self-managed super funds
A self-managed super fund (SMSF) is a super fund where investments and life insurance choices are managed by a small group of trustees including yourself. Some key characteristics include:
- Greater control of investments
- Higher account-keeping costs
2. Managed super funds
This is where your investments are managed by a large fund and life insurance policies are managed by a trustee in a super fund. Managed super funds that include life insurance can typically be:
- A retail super fund
- An industry super fund
- Set up by your life insurer
How is life insurance through super taxed?
Life insurance inside super is different to cover outside of super when it comes to tax. Tax rules will also differ according to the specific type of life insurance.
| Life insurance | Income protection | TPD | ||
|---|---|---|---|---|
| Inside super | Premiums | Tax-deductible | Tax-deductible | Tax-deductible |
| Benefits | Tax-free for dependant beneficiaries | Taxed | Taxed | |
| Outside super | Premiums | Not tax-deductible | Not tax-deductible | Not tax-deductible |
| Benefits | Tax-free (no matter who is the beneficiary) | Tax-free | Tax-free |
How is life cover through a self-managed super fund (SMSF) different?
Life insurance through an SMSF has increased in popularity over recent years whereby the SMSF trustee becomes the owner of the policy and is responsible for making the premium payments. In the event of a claim, the benefit is not paid to the policyholder but to the fund. The trustee will distribute the benefit payment to the policy beneficiaries.
Here's how life cover through an SMSF works
10 useful tips for life insurance and superannuation
- Take advantage of cost-effective insurance cover: When you choose to buy life insurance through superannuation, you should get the benefit that comes with group buying. Since your super fund is likely to be purchasing life insurance policies on behalf of a large group of people, insurance companies should offer competitive rates for the same, which help to make the cover more cost-effective for you.
- Life insurance for self-managed super funds: If you are in charge of an SMSF, you need to ensure that buying life insurance through superannuation is a decision that is beneficial for every member of your fund, according to their specific situations. If the decision does not tie in with the investment strategy of the fund, you may have to rethink the decision.
- Put in place a binding nomination: A binding nomination ensures that your death benefit is paid to the trustee of your choice. If you do not nominate someone, the trustee will decide who the benefit is paid to.
- Tax liability for non-dependant beneficiaries: If the beneficiaries of your life insurance proceeds through super are people other than your spouse, your kids or financially dependent persons, they will have to pay tax on the money that they receive through your super fund. This is not so when life insurance is purchased outside super.
- Minimum levels of life insurance cover: Even if you have decided not to choose your own super fund, you should be aware that it is mandatory for your employer to contribute into a super fund and that the fund should provide you with a minimum level of life insurance cover. This can benefit those who do not have any other type of life insurance cover.
- Added cover for disability: Most super funds offer additional cover for disability when you choose to purchase life insurance through superannuation. If your super fund also works along the same principles, you can benefit from the added cover if you become disabled and cannot continue to work for a while.
- Automatic acceptance for life insurance cover: Most super funds offer their members an automatic acceptance for a specific level of life insurance cover. This means you do not have to prove your eligibility for the cover, nor do you have to undergo medical examinations for the same. This can be especially useful for people who have a difficult time getting insurance outside of super.
- No automatic acceptance for your own super fund: You can take advantage of automatic acceptance by opting to pay for life insurance through superannuation. However, you need to be aware that if you are choosing your own super fund, you may not be eligible for this benefit. This benefit is usually available to those people who opt to become part of a super fund that their employer has a special arrangement with.
- Added cover for income protection: Another advantage of purchasing life insurance through superannuation is that you can choose income protection as an ancillary cover within your core life insurance policy. This helps you to protect yourself and your loved ones from a loss of income arising from serious illnesses and disabilities.
- Fulfilling the conditions of release: This is a vital consideration if you are thinking of buying life insurance through superannuation. You should know that every super fund has certain conditions of release for benefit payouts. Only if those conditions of release are satisfied will your beneficiaries be eligible to receive any money from your super account. Therefore, if there is any ambiguity or doubt in your mind whether a certain circumstance will fulfil the conditions of release or not, you may want to consider buying life insurance outside superannuation.
Some final questions you might have
Flexible linking: Combine your life cover inside super with policies outside of superannuation
You can now link your existing life insurance in super with policies outside super, such as income protection, TPD and trauma cover, with a new feature called flexible linking. This feature enables policyholders greater flexibility in managing their life insurance policies inside and outside of super, without sacrificing the quality of cover that they require. Currently, flexible linking is only available through select providers.
Flexible policy options
There are a few options to make your policy more flexible.
- Bundling. One option is a combined policy where you can link multiple coverages, such as life and critical illness insurance, into one policy.
- Flexible policy linking. Another option is policy linking. Policy linking allows you to split your policy ownership between your super fund and individual ownership.
Ready to compare policies? Receive a quote from an adviser
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When should an insurance be unnecessary in superfund?
Hi ASAJILE,
Thank you for your question.
finder.com.au is a comparison and information service and we are not permitted to provide our users with personalised financial advice or product recommendations. You should contact your super fund directly for clarification on this matter.
All the best,
Zubair
If you have two superannuation policies, one personal and the other where a % of your wage from your employer puts into , and both have a life insurance cover, can you stop one insurance cover and use the premium amount to bolster your super contribution’s.
Hi Allan,
Great question. In some cases, you can consolidate the cover of two policies together. However this will depend on the specific conditions of the two policies.
It’s a good idea to get in touch directly with your insurer or a financial adviser.
I hope this helps,
Maurice