Most Australians* don't realise: Your superfund includes life insurance.
Whether you signup to a superfund yourself or your employer organises it for you, the fund usually includes a minimum level of protection to cover you in the event of death, injury, illness or 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.
*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
Is my super insurance worth keeping?
Our recommendation:
- Don't rush to cancel cover inside your superfund. Insurance is included for a reason: It can save you a lot of trouble in a tough situation. For instance if you have a medical condition, a default super insurance plan might cover you automatically1 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.
Should I get super inside or outside life insurance?
While it's convenient use the policy that's included with super, there may a standalone policy there that's more suitable to your needs. It's worth reviewing the benefits and drawbacks on cover inside super:
Inside super: The good
- It's usually cheaper. The super fund is generally able to buy life insurance in bulk, and therefore negotiate a cheaper rate. It means that it can be an inexpensive way to purchase life insurance.
- No medical exam required. As the insurance is usually taken out as a group policy through the super fund, individual medical checks aren’t usually required.
- Pre-existing medical conditions may be covered. If you get default cover through your employer, then pre-existing medical conditions may be covered.
- Tax benefits on premiums. The premiums which pay your life insurance come from your contributions made by your employer (or you) to your super fund. Therefore, if you are self employed the premiums can be a tax deduction. If your contributions are made as part of a salary sacrifice, then they are paid from your pre-tax income.
- Automatically included and hands off. This means that even if you haven’t thought about taking out life insurance, you are likely already covered to some extent through your super fund.
Inside super: The not so good
- Less cover than you need. As most super life insurance is bought as a group, the amount of cover you have is generally less than you would ideally need.
- Less control over who is paid out. In many cases, the trustee of the super fund has absolute discretion over who receives the death benefit, where all potential beneficiaries are required to come forward and express an interest in the benefit payout.
- Reduces your final super balance. Your life insurance premiums are paid by automatically deducting from your super balance. This means when you retire you'll have less money available.
- No trauma cover. Super cover won't include trauma insurance. Trauma insurance pays out if you suffer a serious illness e.g. cancer
- Benefit is paid to your superfund first. This can mean that there is a delay from the time of your death to the time that your family receives the benefit amount from your life insurance policy.
Superannuation life insurance vs choosing your own cover: The key differences
Here are the key differences between life insurance inside and outside of super.
| Compare | Inside super | Outside super |
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| Premiums deducted automatically from your super balance |
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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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Insurance comparisons inside and outside super
6 things to know about super life insurance
1. Default cover is done for convenience
A minimum amount of life insurance cover is compulsory inside super to help fund Australia's underinsurance gap. This is to ensure if something serious happens to you, there is some level of protection for you and your family. For some people it's easier to pay for insurance automatically through super, instead of having an additional expense on top of your regular expenses.
2. There are various types of cover available inside super
- Death cover
- Total and permanent disability insurance
- Income protection insurance
3. Payments are automatic
Premiums are automatically deducted from your superannuation.
4. Having super inside and outside cover may not be worth it
In some cases, you can receive a benefit payment from both policies but it's worth checking with your provider.
- Start with the super policy or ask the trustee of your superfund.
- Then speak to either the adviser you bought your seperate policy from or the insurer directly.
It's a good idea to also check whether or not either policy is a good fit for your needs. For instance you might have developed a pre-existing condition after taking out cover - This wouldn't be covered if you applied again later on.
5. You can use your super to fund a policy you've found yourself e.g. online
Some insurance companies allow you to apply for cover with them but continue to fund the cover from your superannuation by performing a superannuation rollover.
6. Your life stage matters when selecting the type of cover inside super
While it might not make sense to pay for a death benefit without any dependents, cover often will include other benefits such as TPD or income protection. It's a good idea to get in touch with your superfund to see what your policy offers. Alternatively, speak to an adviser.
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. |
Receive a super life insurance quote
In-depth guide to superannuation cover
What's in this guide?
How does superannuation life insurance work?
Life insurance policies through a super fund work differently to a standalone policy.
1. Paying for cover
How are my premiums paid for?
Premiums are paid from your super fund. This means a portion of your contributions to your super fund are taken to pay for premiums. Make sure you routinely check the amount of money you have in your super fund so that it doesn’t empty the account over time.
2. Ownership and payouts
Who owns a policy?
If a policy is taken out through a super fund is technically owned by the super fund. The owner may be a named trustee who is able to pay out the benefits to listed beneficiaries.
When is a payout made?
Once certain conditions such as terminal illness or death are met, the funds can then be paid out to listed beneficiaries. Note: Any benefit is first paid out to the super fund before going to beneficiaries.
3. Choosing where the benefit goes
Can I choose where the 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.
- 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 age | Cost per unit | Cover that's included in each unit | How many default units you get | End result (for 4 units of cover) |
|---|---|---|---|---|
| <25 | $3 per week | $50,000 | 2 | $12 per week, for $200,000 of cover |
| 25 to 45 | $3 per week | $20,000 | 4 | $12 per week, for $80,000 of cover |
| 45 to 65 | $3 per week | $10,000 | 4 | $12 per week, for $40,000 of cover |
| 65+ | $3 per week | $5,000 | 6 | $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
| Age | Cost of cover | Cost 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
- 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 |
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?
What are the advantages and disadvantages of SMSF Life Insurance?
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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 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.
- 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, 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.
- 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
What are the benefits of life insurance outside of superannuation?
While funding your life insurance through superannuation may be a more affordable option, there are some key benefits of funding cover outside super that may lead you away from this option:
- Increased level of cover: Less restrictions on sum-insured to be applied for and greater range of additional benefits.
- Straightforward claims and benefit payment process: Much more straightforward process for the payment of benefit in comparison to cover inside superannuation where it is first paid to the fund trustee.
- More cover options: More types of cover and greater selection of policies available outside of super. Trauma Insurance is not available through superannuation.
- Retirement funds are not reduced: You are not chipping away at the hard-earned retirement funds in your superannuation.
- Tax-free benefit payments: The benefit payments are tax-free regardless of the beneficiary it is paid to.
- Own Occupation: Own occupation definition of disability is only available for TPD insurance outside of superannuation.
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
Back to top* 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.
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