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).
Maurice Thach is the publisher for life insurance at Finder. His favourite question is "Am I covered for _____?" Maurice hopes to make insurance cover inside and outside super a lot clearer for Australians.
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
It's usually cheaper
Reduced medical exam requirements
Pre-existing medical conditions may be covered
It's usually cheaper
A 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.
Reduced medical exam requirements
As the insurance is usually taken out as a group policy through the super fund, individual medical checks aren't usually required or as extensive.
Pre-existing medical conditions may be covered
If you get default cover through your employer, pre-existing medical conditions may be covered.
Tax benefits on contributions for death and TPD cover
The premiums that pay your life insurance come from the 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, 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. In many cases, your employer will make contributions to your super fund for you.
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
Harder to prove disability
Inside super you'll have to prove you can't work in any occupation again. For example, if you are a lawyer and are severely injured but can still work as a receptionist, you won't be covered.
The amount of cover is not what you need
As most super life insurance is bought as a group, the amount of cover may either be too much or too little without you being aware.
Reduces your final super balance
Your life insurance premiums are automatically deducted from your super balance. This means when you retire you'll have less money available. Deductions will still happen even if your employer stops contributing to super.
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.
Some cover types not available
Super cover won't include trauma insurance. Trauma insurance pays out if you suffer a serious illness, e.g. cancer.
Benefit payment can take longer
The payment goes to your super fund first. This often means 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.
The expiry age may be lower
Policies inside super may expire around the age of 70, whereas some policies outside super can have an expiry age of up to 100.
No tax benefit on income protection
Taking income protection insurance outside of your super allows you to make tax deductions.
*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.
The actual balance that you end up with could vary based on a few factors. In our analysis we assumed the following:
The policyholder started "default cover" at the age of 25
Their salary started at $50,000 and increased by 7.2% each year
They contributed 9.5% of their salary to super each year
The yearly cost of insurance was based on default cover for each fund between the ages of 25 and 45
The super returns for each fund were based on SelectingSuper's list and we assumed the interest rate was accrued annually. The actual return you get each year may vary
This was the calculation we used to get the difference each year:
Calculation
Difference in yearly balance = [Balance at start of year x Average annual return rate over 20 years] - [(Balance at start of year - Cost of insurance for that year) x Average annual return rate over 20 years]
We then added this up over 20 years.
Salary at age (7.2% growth per year)
Yearly contribution before investment (9.5%) - principal
$50,000
$4,750
$53,600
$5,092
$57,459
$5,459
$61,596
$5,852
$66,031
$6,273
$70,785
$6,725
$75,882
$7,209
$81,345
$7,728
$87,202
$8,284
$93,481
$8,881
$100,212
$9,520
$107,427
$10,206
$115,162
$10,940
$123,453
$11,728
$132,342
$12,572
$141,870
$13,478
$152,085
$14,448
$163,035
$15,488
$174,774
$16,604
$187,357
$17,799
$200,847
$19,080
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)
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 to 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 super fund)
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 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.
Did you submit incorrect details? Not to worry, you can edit them below.
*Past performance data is for the period ending December 2018.
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.
Wide range of features including accidental injury and guaranteed future insurability. Expiry age of 100 with clear pricing for all ages and occupations
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…
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.
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 three years and become non-binding unless it is 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 life insurance you have may decrease with your age
Many insurance policies that are included with your super are by default “unit-based” cover. What this means is that you are given “units” of cover based on your age. As you get older, the amount of cover you have decreases.
We spoke to Julia, a former ambulance officer (57, Queensland) who made a claim in 2016 for fibromyalgia, a condition resulting in widespread muscle pain and tenderness. This claim came after suffering PTSD in the two years prior. She made the claim under the assumption that she would receive $450,000.
After undergoing an 18-month claims process with her superannuation fund, she was notified that she would receive $300,000 in disability cover. This was $100,000 less than the amount Julia believed she would be entitled to when she “ticked the box” for insurance with her super.
“They told me I could only receive $240,000 because of my age, which is almost half of what was promised… then they said they would backdate the payment to 2015 so I would receive 300,000.”
After speaking to a representative from the super fund, we can confirm that the policy does reduce cover as you get older, but will backdate the amount covered to the date of the claim.
“Make sure you check if your cover diminishes as you get older. Age reduces cover and it’s something I wish I had known sooner.”
What’s the lesson?
Find out if you have unit-based cover. That way you won’t be surprised if you find that your cover decreases with your age. You may also be able to change your cover to a “fixed” arrangement that doesn’t decrease with age.
Make sure you review your life insurance regularly. If Julia was aware of the way her cover would diminish over time, she could have adjusted the amount she was covered for before it was too late.
It’s not all bad. You will be backdated to the moment where you are actually diagnosed. If you’re unsure, check with your super fund.
A tip from Julia
When making a claim: “Be aware of the independent medical assessments, especially those provided by the insurance company. Demand taking in a support person who can witness and verify what he or she said.”
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:
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.
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.
In many cases, yes you do need additional coverage as the life insurance coverage amounts available through superannuation are generally lower than those offered by life insurance companies independently, and may not be enough to cover your expenses.
Depending on your super fund provider, you can generally access life insurance (also known as death cover), total and permanent disability insurance (TPD) and income protection insurance (also known as salary continuance insurance).
The trustee of the super fund will decide how the benefit amount is distributed.
You can nominate your beneficiaries in any way you choose, but you will need to understand the terms and conditions of your super fund, to know when, how and if those nominations are valid.
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.
*The products compared on this page are chosen from a range of offers available to us and are not representative of all the products available in the market. There is no perfect order or perfect ranking system for the products we list on our Site, so we provide you with the functionality to self-select, re-order and compare products. The initial display order is influenced by a range of factors including conversion rates, product costs and commercial arrangements, so please don't interpret the listing order as an endorsement or recommendation from us. We're happy to provide you with the tools you need to make better decisions, but we'd like you to make your own decisions and compare and assess products based on your own preferences, circumstances and needs.
Maurice Thach is the publisher for life insurance and business insurance at Finder and has been writing about insurance for 3+ years. His is favourite question is "Am I covered for _____?". Maurice has completed a Tier 1 Life Insurance Certification and a Tier 2 General Insurance Certification under ASIC's Regulatory Guide 146. This means he can confidently provide general advice for life insurance and non-life insurance products to Aussie readers everywhere. Outside of work, you'll probably find Maurice hitting up the nearest basketball court.
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.
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.
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.
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.
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Income Protection Insurance Calculator
The estimate amount of income protection you need is
Inside super: The good
Inside super: The not so good
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