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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.
Should you keep your super life insurance? Review the pros to see if it's the right option for you.
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.
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
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.
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.
Here are some of the cons to life insurance through superannuation.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
Here's why direct life insurance might be a better way to go.
The disadvantages of buying direct life insurance.
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.
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:
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.
To find out if you have life insurance inside your super, you can:
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.
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.
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.
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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