Life insurance through superannuation
Life insurance can be within your super, bought as a standalone policy, or both. Find out which option works best for you.
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Life cover is often included in your superannuation by default but it's not compulsory and canceling it isn't difficult. It usually comes with a payout of around $100,000 and $200,000, which for the average Australian often is not enough to pay off all debts and ensure your family can continue paying the bills without you.
In spite of that, more than 70% of Australians that have life cover, including total and permanent insurance, hold it through their super fund. So is life insurance through super right for you? To help you decide, we've laid out the pros and cons.
Advantages of life insurance through super
Should you keep your super life insurance? Review the pros to see if it's the right option for you.
It's usually cheaper
A super fund usually buys life insurance in bulk for large groups of people which means that premiums are often discounted. This form of pricing means you can usually expect to pay less for cover held inside superannuation. Being cheaper overall is one of the key reasons many people choose to rely on the cover in their super, rather than looking at stand alone policies outside of super.
Life insurance through super can be automatically included when you open a new fund and the premiums are deducted directly from your super balance. With guaranteed acceptance and this unique way of paying premiums, many people find that it is the most convenient way to have cover.
While it may be convenient to pay insurance out of your super, it can eat away at your long term savings, so it's essential to make sure contributions to super are continuing while your insurance is inside super.
It's also worth noting that since April 2020, people under the age of 25 will no longer automatically receive life insurance when they open a super account, unless they're working in a high-risk job. Policies will also be cancelled if they have balances with less than $6,000 in them or haven't received contributions for at least 16 months.
Fewer health checks
Because the insurance is usually taken out as a group policy through the super fund, individual medical checks aren't usually required. This can be helpful if you work in a high-risk job or have any health conditions as you might have difficulty getting cover elsewhere. However, if you want to take out extra cover through your super fund, you'll usually be required to undergo some sort of medical exam.
Your employer's super contributions are taxed at 15% which is lower than the marginal tax rate for the majority of people, meaning you'll save money on tax. This is because according to the Australian Taxation Office (ATO), you can agree with your employer to 'sacrifice' some of your salary or wages by having some of it used to go straight into your super fund. You can also do this if you're self-employed
You can increase your cover
If you want to get more than the standard amount of life insurance cover that your super fund provides then you can generally apply for more cover. However, you will most likely have to undergo a medical exam or questionnaire and your premiums will increase. If you want to continue paying for life insurance through your super though, and don't have any medical issues, it might be worth getting.
Higher claims payouts
According to statistics from APRA (the Australian Prudential Regulation Authority), super funds paid out 85 cents of every dollar of paid in premiums for death claims and 95 cents for TPD in super (total and permanent disability) claims. For insurance purchased through financial advisers, the payout ratio was much lower at 42 cents of every dollar for death policies and 49 cents for TPD policies. In a nutshell, claims made on insurance through super have historically been more likely to be paid out than those made on direct or retail insurance policies.
APRA data also suggested that claims were processed faster when held in super than in retail or direct products.
Disadvantages of life insurance through superannuation
Here are some of the cons to life insurance through superannuation.
Reduces your retirement balance
If there's money regularly coming out of your super, it's less money available for your super fund to invest, which will eat into your retirement savings. It can also be particularly difficult if you only work part-time or on a casual basis as monthly premiums could seriously affect your account balance. As of April 2020 though, deductions will stop if you have less than $6,000. This is to try and prevent insurance premiums from significantly impacting retirement savings.
The amount of cover is not always enough
Guaranteed acceptance means you will be given an automatic level of cover . The standard benefit amount is usually between $100,000 and $200,000. That may seem like a lot but it's generally recommended that your life insurance is around 5 to 10 times your annual salary. Another way you can work out roughly how much you need is to multiply your annual salary by the number of years left until you will retire. In most cases, you'll find that $100,000 to $200,000 is not enough to cover your mortgage, debts, loans and your family's everyday living expenses.
Cover ends at age 65 or 70
TPD insurance cover in super usually ends when you reach 65 and life cover ends when you turn 70 so you risk paying premiums for all those years and not even receiving a payout. If you buy a policy outside of super, you can usually maintain cover until you're 99 or for as long as you keep paying up the payments.
Life expectancy in Australia is now on average 82.5 years, so there's a good chance this insurance won't cover you at a critical age in life.
No cover for critical illnesses
An important type of insurance, known as trauma insurance or critical illness cover, is not able to be taken out through superannuation. Trauma insurance is offered by most direct life insurance brands as part of comprehensive insurance cover. It offers a lump sum payout to you if you become seriously unwell with a medical condition. The payout is designed to help cover expenses associated with ongoing medical conditions that can seriously impact your ability to maintain your standard of living.
If you change funds, your cover might end
It's common for us to change jobs these days, and with that we often change super funds. But if you do this, there's a good chance your cover will cease as you're no longer contributing to your super, wasting all that money you spent. Unless you let them know otherwise, your premiums and cover will stop if you don't contribute into your super account for 15 months.
Your nominated beneficiary might not be guaranteed
The Australian Tax Office (ATO) states that who receives the benefit will depend on the rules of your super fund and the requirements of the relevant regulations. To guarantee who the beneficiary will be, you need to contact your super fund and see if it's possible for them to change it to the person(s) of your choice.
Multiple funds might mean you're paying for insurance you don't need
If you have more than one super account, you could be paying premiums on multiple insurance policies. Not only will this eat into your retirement savings, but you might not be able to claim on multiple policies. According to the ATO, roughly 39% of Aussies have more than one super account. If this applies to you, be sure to review these policies and consolidate super where possible.
The payout might be delayed
With life insurance through super, your superannuation fund receives the payout before your beneficiaries do. The trustee then has to decide whether the condition of release has been met and decide who the correct beneficiary is (if you have failed to nominate one) which can take some time. This process is much quicker if you buy a standalone policy because it simply goes from the insurer to your nominated beneficiaries.
Can I remove insurance from super?
You can remove insurance from super at any time. Just get in touch with your super fund or check your super's online platform. Before you cancel though, it's worth taking the following into account:
- Consider your life stages and what you need. For instance, if you are young and have no dependents 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.
How is direct life insurance different?
Direct life insurance is different to life insurance through super in that it's purchased directly from an insurer. Like life insurance through super, it pays a lump sum to your beneficiaries (usually your family or a partner) when you die or become seriously ill. There are a few different types of life insurance. These include death cover, total and permanent disability (TPD), trauma and income protection.
You can apply online for direct life insurance yourself and tailor your policy to your specific needs, based on factors such as your age, your job, how many dependents you have and the debts, loans and lifestyle you lead.
The premium payments come out of your bank account — not your super — and you have more freedom to choose how much cover you want. For instance, some insurers will payout as much as $15,000,000.
You also get to nominate your beneficiaries when you take out a policy, so you don't need to worry about getting in contact with your super fund and submitting a binding death nomination.
Pros of direct life insurance
Here's why direct life insurance might be a better way to go.
- The freedom to choose a policy that is tailored to your life's needs as opposed to the default cover provided through super.
- The choice to pay stepped premiums or level premiums. Stepped premiums usually start out cheaper but increase over time, while level premiums are initially more expensive but often more sustainable over time.
- Cover doesn't stop at a specific age. It generally continues as long as you pay the premiums, or at least has a much older age limit, e.g 99 compared to 70 with life insurance through super.
- Peace of mind, knowing that you'll be able to leave enough behind for the people who depend on you.
Cons of direct life insurance
The disadvantages of buying direct life insurance.
- Premiums can be more expensive than paying for a policy through super.
- You generally need to fill out a medical questionnaire or do a medical exam in order to get cover.
- It can be tricky or more expensive to get cover if you have any pre-existing medical conditions.
- It can be hard to calculate how much cover you need without the advice of a broker.
Compare direct life insurance with Finder
Bottom line - Is super insurance worth it?
If you've already been paying life insurance through super for a number of years, then it probably isn't worth cancelling your cover as you'll simply lose all those premium payments. However, it's still worth buying standalone life insurance coverage — which can provide you with enough money to pay off debts and expenses — and using your super insurance as a supplement. For instance, if you needed $1 million worth of cover, and your super insurance had a payout of $100,000, you could get a $900,000 standalone life insurance policy.
Super insurance can impact your retirement savings and as APRA stats suggest, the premiums are barely worth the payout. If you haven't already lost a significant amount of your super to premium payments, then it might be worth cancelling and getting a life insurance policy that you can actually tailor to your needs. You can begin comparing policies here.
Is life insurance compulsory with superannuation?
How are premiums paid for life insurance through super?
Can you add insurance or increase existing insurance inside super?
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