Life Insurance through superannuation: Is it the best option?

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.

Updated . What changed?

Fact checked
Picture not described

We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!

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.

It's convenient

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.

Tax benefits

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

Data updated regularly
Name Product Maximum Cover Maximum Entry Age Fully Underwritten? Terminal Illness Benefit Online application
NobleOak Life Insurance
$15,000,000
69
$3,000,000
⭐Finder Exclusive: Get a 10% discount on your first 12 months with NobleOak Life Insurance. Offer ends 31 March 2021. T&Cs apply.
Real Family Life Cover
$1,000,000
64
$1,000,000
Get a refund of 10% of the premiums you've paid (in the first 12 months) with The Real Reward™ .
Medibank Life Insurance
$2,500,000
70
$2,500,000
You could win a $2.5K EFTPOS gift card when you get a Life Insurance quote by 27 April, 2021. There are 3 prizes of $2.5K to be won. Plus, Medibank health members save 10% every year. T&Cs apply.
Zurich Ezicover Life Insurance
$1,500,000
69
$1,500,000
Get the first month free and a 10% discount if you take out a second life insurance policy (discount applies to second policy). T&C’s apply.
AAMI Life Insurance
$1,500,000
65
$1,500,000
Get 5% off for existing customers and get 12 months life insurance cover for the price of 11.
ahm Life Insurance
$1,500,000
65
$1,500,000
ahm Health members can save 10% off premiums.
Suncorp Life Protect Insurance
$1,500,000
65
$1,500,000
Sign up and become a member of Suncorp Benefits. Access savings of up to 15% from major retailers. Existing members can get a 5% discount off their policy.
loading

Compare up to 4 providers

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.

FAQs

Is life insurance compulsory with superannuation?

No, life insurance inside super is not compulsory. From 1 April 2020, super funds are now required to cancel insurance on inactive super accounts that haven't received contributions for at least 16 months. Super funds can't automatically provide new members with insurance cover unless they are at least 25 years of age, or have a minimum super balance of $6,000. Your super fund will contact you if your insurance is about to end for these reasons.

If you want to keep your superannuation insurance, you'll need to contact your super fund to let them know or contribute to that super account. It might be worth keeping your insurance if:

  • You can't currently afford a standalone life insurance policy
  • 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.

How are premiums paid for life insurance through super?

The premiums for life insurance through super are deducted from your superannuation account balance, not your own bank account. This is one of the reasons life insurance through super can be convenient for some people - it's easier on your immediate cash flow. If you have a mortgage to pay, a family to feed, or other financial commitments, you won't have to worry about life insurance premiums coming out of your bank account. Having said that, it's still costing you regardless, plus it's taking money away from your retirement fund.

How do I check if I have existing insurance in my super?

To find out if you have life insurance inside your super, you can:

  • Call your super fund and enquire with them directly
  • Login to your super account online
  • Check your super fund's annual statement or product disclosure statement (PDS)

This should give you access to the type of insurance you have, as well as how much cover you have and how much you're paying for it.

If you've ever had more than one super account, you may have more than one life insurance policy. To be sure, get in touch with all of your super funds and see if you have an active account and life insurance policy with them. Having more than one life insurance policy is usually pointless, as you're effectively paying for the same thing more than once and you might not receive both payouts.

Can you add insurance or increase existing insurance inside super?

It depends. If you can, you will usually need to answer health and lifestyle questions. The reason life insurance inside super is generally cheaper than standalone policies is that it's essentially a one-size-fits-all. That means if you wanted to increase your coverage, you'd probably need to answer questions about your health.

Why was my life insurance cancelled inside my super?

Your super insurance cover can end if you stop paying into your super for 15 months or if you are aged under 25. This is part of new legislation starting from April 2020. Insurance will also be cancelled on super accounts with balances less than $6,000.

More guides on Finder

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.

4 Responses

    Default Gravatar
    ASAJILEMarch 31, 2017

    When should an insurance be unnecessary in superfund?

      Avatarfinder 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

    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.

      Avatarfinder 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

Go to site