super-life

Superannuation Life Insurance

Is insurance inside super a rip-off?

Many Australians* don't realise that their superfund 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

This is usually at a competitive rate as cover is provided under one 'group' policy which enables employers to standardise the cost of cover for all its employees.

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).

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 to your needs. It's worth reviewing the benefits and drawbacks on cover inside super:

ProsInside super: The good


  • It's usually cheaper
  • Reduced medical exam requirements
  • Pre-existing medical conditions may be covered

ConsInside 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.

Life insurance inside vs outside super

Here are the key differences between life insurance inside and outside of super.


Inside super

Outside super
Premiums deducted automatically?
  • Yes
  • No (unless you link cover your super)
Eats into your super balance?
  • Yes
  • No
Benefits are paid out to the person you name on your policy?
  • No, first to your trustee then your beneficiaries after conditions of release
  • Yes
Is automatically renewed?
  • Yes
  • You might need to inform your insurer
Can my life insurance be tailored?
  • Yes (check with the superfund)
  • Yes (check with insurer)
Pre-existing medical conditions automatically covered?
  • Might be automatically covered if bought under default super with an employer
  • Assessed on an individual basis

Should I cancel my super insurance?

Not so fast:

  • Don't rush to cancel cover inside your superfund. 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 5 years will different to what they are now.

Insurance comparisons inside and outside super

Compare and pay for policies with your super

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Coverage is the amount of money that you will be paid in the event of a claim. An insurance consultant can help you determine an appropriate amount. Calculator
Provides a lump sum payment if you become totally and permanently disabled and are unable to return to work.
Provides a lump sum payment if you suffer a serious medical condition. Cover can be taken out for 40-60 medical conditions depending on the policy you choose.
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Name Product Maximum cover Maximum Entry Age Minimum Sum Insured Guaranteed Future Insurability Expiry Age Short Description
$1,000,000
64
$100,000
No
No expiry age as long as premiums are paid
First month FREE when you take out Real Family Life Cover. Available for a limited time (T&Cs apply).
$1,500,000
69
$50,000
Yes
99
Receive a 10% discount on the second person when two applications are submitted at the same time, and both policies are issued.
$1,500,000
65
$3,000
No
80
Choice of cover options and flexible premiums to suit your budget. No lock-in contracts and fast application.

$1,500,000
65
$100,000
Yes
99
Tailored life insurance so you know what you're covered for upfront. Take out a policy and get a $100 bonus gift after holding cover for 2 months. T&Cs apply. Ends 31 March 2019.
$1,500,000
64
$100,000
No
No expiry age as long as premiums are paid
Cover up to $1.5 million with Guardian Life Insurance.
$15,000,000
69
$0
Yes
99
Protect your family with up to $15 million in cover. Plus, get your first month free. T&C's apply.
$1,000,000
65
$100,000
No
No expiry age as long as premiums are paid
Receive one month's premiums off every year if you pay annually upfront. T’s and C’s apply.
$2,000,000
59
$50,000
Yes
99
Get flexible life insurance up to the sum of $2,000,000.

Compare up to 4 providers

Name Product Past Performance - 1 Year Past Performance - 3 Years Past Performance - 5 Years Calculated Fees on $50,000
10.62%
New Fund
New Fund
$358
Earn Velocity Frequent Flyer Points for making contributions to your super. T&Cs apply.
11.08%
9.3%
10.51%
$421.76
Enjoy discounted rates on banking products with ME Bank and health cover with GMHBA health insurance.
N/A
N/A
N/A
$683
Choose between 14 different investment options, including a socially responsible option.
9.63%
7.84%
8.88%
$535
Socially responsible and ethical investment options available.
7.57%
8.08%
N/A
$450
Awarded Best Fund for Member Services in 2016 and Best Fund for Investments in 2017 by Chant West. Pay no entry, exit or switching fees and enjoy a range of different investment options with QSuper.
10.7%
8.61%
9.84%
$553
Earn a Retirement Bonus of up to $4,800 when you open a new Income account. T&Cs apply.
10.57%
8.12%
9.51%
$573.53
Get access to one-on-one professional advice at no additional cost.
6.7%
6.26%
7.52%
$662
Choose investment options that align with your personal values.
11.43%
7.73%
8.76%
$703
Access offers, deals and discounts through the BT Super Benefits Now program.
10.95%
9.39%
10.41%
$565
Enjoy discounted health insurance with HCF.
8.79%
8.51%
9.59%
$646.76
Get fee-free advice on your superannuation as a BUSSQ member. T&Cs apply.
7.41%
6.24%
7.89%
$601.76
Receive a complimentary financial planning session with a Suncorp financial planner.
12.5%
10.17%
11.02%
$621.76
Enjoy discounted rates on banking products with ME Bank.
9.39%
8.6%
9.93%
$535.88
Access simple personal advice at no cost.
8.14%
6.5%
N/A
$703
Gain access to lifestyle offers and benefits on NAB financial products and services.
8.76%
7.14%
8.81%
$497.60
Earn rewards and vouchers through the AIA Vitality program.
10.45%
8.61%
10.14%
$361
A flexible industry super fund for people who work in Australia’s higher education and research sector.

Compare up to 4 providers

The information in the table is based on data provided by Chant West Pty Ltd (AFSL 255320) which is itself supplied by third parties. While such information is believed to be accurate, Chant West does not accept responsibility for any inaccuracy in such information. Chant West’s Financial Services Guide is available at https://www.chantwest.com.au/financial-services-guide . Finder offers no guarantees or warranties about the data and we recommend that users make their own enquiries before relying on this information. Performance, fees and insurance data is based on each fund's default MySuper product. Where the performance, fees and insurance data for the MySuper fund vary according to the member's age, results for individuals between 40-49 years of age have been shown. Past performance is not a reliable indicator of future performance.

*Past performance data is for the period ending June 2018.

We also recommend reading these guides

What's the best superannuation life insurance policy on the market?

The Australian Financial Reviews' annual Blue Ribbon Awards identified the best life insurance policies inside superannuation. Some of the main criteria looked at 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.

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In-depth guide to superannuation cover

How does superannuation life 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 superfund 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 superfund or check your super's online platform.

The four types of insurance available in super

Terminal Illness

Death

Total and Permanent Disability

Income Protection

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, you can personally choose a 'beneficiary' who will receive your insurance benefit payment.

Two types of nominations

There are two types of nominations:

  • Binding. In a binding nomination, the trustee of the super fund must pay your benefit to the beneficiary you have nominated. The beneficiaries will be paid the amount in any proportion up to 100%. A binding nomination will expire after 3 years and becoming non-binding unless they are updated by you.
  • Non-binding. A trustee will have the final say on a non-binding nomination and will take the beneficiary and will into account when deciding on a non-binding nomination. The trustee will have the final decision on the proportion of payment. Non-binding beneficiaries can include dependents not listed as binding beneficiaries. Non-binding beneficiaries do not have to be updated or renewed.

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.
It’s called “unit based cover” because your cover is divided into units and each unit costs a fixed amount per week e.g $3/unit a week. Your age determines:
  • How much cover is included per unit
  • How many default units are included

Default units

Superannuation life insurance will typically offer a “default” number of units. This is how many units of cover are automatically included, depending on your age.. You can then choose to purchase additional units to get more cover.

Unit based example

Your ageCost per unitCover that's included in each unit How many default units you getEnd result (for 4 units of cover)
<25$3 per week$50,0002$12 per week, for $200,000 of cover
25 to 45$3 per week$20,0004$12 per week, for $80,000 of cover
45 to 65$3 per week$10,0004$12 per week, for $40,000 of cover
65+$3 per week$5,0006$12 per week, for $20,000 of cover

You choose how much cover you need, and the cost is determined for you. The amount of cover you have will generally stay the same as you get older, but the cost will increase.

Fixed cover example

AgeCost of coverCost of $100,000 of cover
<25$2 per week, per $10,000 of cover$20 per week
25 to 45$4 per week per $10,000 of cover$40 per week
45 to 65$8 per week per $10,000 of cover$80 per week
65+$15 per week per $10,000 of cover$150 per week

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

An self managed super fund (SMSF) is a super fund that 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
  • Setup by your life insurer
`A super fund can be used to purchase other policy options. Options include:
  • Terminal Illness benefit. This will provide you with a lump sum payment if you are diagnosed with a terminal illness and given up to 12 months to live. The payout will be released from your super fund to your beneficiaries and can be used for medical bills, funeral arrangements or as income.
  • Total permanent disablement insurance. It is possible to take out a TPD insurance policy through your super fund either as a standalone policy or in a combined policy.
  • Income protection. Many life insurance brands will allow you take out income protection insurance policies through a super fund to be used if you cannot work for a period of time.
  • Trauma insurance. Since 2014, it is no longer possible to take out trauma or critical illness insurance through your super fund.

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 also will 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

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How is life cover through a Self Managed Super Fund Different?

Recent years have seen an increase in popularity of life insurance through Superannuation funds whereby their 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.

How does life cover through self managed super funds work?

Self Managed Super Fund Diagram

What are the advantages and disadvantages of SMSF Life Insurance?

Advantages
Disadvantages
  • Cash Flow: As the insurance policy is owned by the SMSF, premium payments will be made with funds that have already been accumulated. This means that employer super contributions can be directed straight towards premium payments. Essentially, the stress of covering your next premium payment is removed.
  • Tax Concessions: A key benefit of taking out life cover through a SMSF is the tax concessions. Members are generally able to claim insurance premiums as a tax deduction of the fund.
  • Limited Range of Cover: Many SMSF Life Cover policies will only provide the bare minimum level of coverage and will not offer the additional benefits available in standalone policies i.e. rehabilitation expense benefit, accommodation benefit etc.
  • Reduction of Retirement Funds: As premium payments are made from the members retirement savings, the funds they have accumulated for their retirement will have greatly reduced. Members can make additional payments to their fund to offset this cost.
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10 useful tips for life insurance and superannuation

  1. 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.
  2. Life insurance for Self Managed Super Funds: If you are in charge of a Self Managed Super Fund (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 situation. If the decision does not tie in with the investment strategy of the fund, you may have to rethink the decision.
  3. 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.
  4. 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, then 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
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Some final questions you might have

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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.

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* The offers compared on this page are chosen from a range of products finder.com.au has access to track details from and is not representative of all the products available in the market. Products are displayed in no particular order or ranking. The use of terms 'Best' and 'Top' are not product ratings and are subject to our disclaimer. You should consider seeking financial advice and consider your personal financial circumstances when comparing products.

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4 Responses

  1. Default Gravatar
    ASAJILEMarch 31, 2017

    When should an insurance be unnecessary in superfund?

    • finder Customer Care
      ZubairApril 3, 2017Staff

      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

  2. Default Gravatar
    AllanNovember 7, 2016

    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.

    • finder Customer Care
      MauriceNovember 8, 2016Staff

      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

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