Life insurance through super

You may be able to access three types of life insurance cover through your super. They are:

• Life cover (also known as term life, or death cover)—pays a lump sum or income stream to your beneficiaries in the event of your death, or if you have a terminal illness.
• Total and permanent disability (TPD) cover—pays you a lump sum if you become permanently disabled and are not likely to work again.
• Income protection (also known as salary continuance cover)—pays you a regular income for a specified period if you can’t work due to temporary disability or illness.

If you’re unsure about what, if any, life insurance cover you have with your super then it could be a good time to check. Look at your latest statement from your super provider or check your online account to see if there is anything mentioned there. If you’re still not sure then it might be wise to contact your super provider directly and ask.

If you do have cover, then you might want to check what type and level of insurance is provided, and what premiums you are paying.

Your super fund’s Product Disclosure Statement (PDS) should say who the insurer is, and include details of the cover available and any conditions that apply when making a claim.

Whether you’re comparing super funds or evaluating your life insurance options, now could be a good time to consider whether insurance within your super is the right option for you.

There are a number of potential advantages to holding life insurance through your super fund.

Life insurance through super may be more convenient

When you have life insurance through super, the premiums for that insurance are deducted from your superannuation account balance, rather than out of your own bank account.

It still costs you either way in the long run, but if you have other financial commitments such as a home loan or other bills to pay, then having the premiums deducted from your super account may make it easier on your immediate cash flow. It would, however, still come out of your retirement nest egg.

If you have multiple super fund accounts you may be paying for multiple insurance policies and the premiums that come with them. The Australian Taxation Office (ATO) provides an online service that helps Australians consolidate their multiple super accounts if they wish to do so.

Some super funds may not require medical examinations when you obtain life insurance

If you have the default level of insurance cover offered by your super fund, some super funds may automatically accept you for cover without requiring a health check. But note that if you want to take out extra cover above the standard level, a medical questionnaire and a medical exam might apply.

Check the PDS of your insurance policy carefully to see whether you’ll be covered for any existing medical conditions you may have.

Super fund policies often include both TPD and income protection insurance, as well as life insurance

Having these policies grouped together with your life insurance through super may be cheaper than seeking separate insurance policies from elsewhere, as super funds can buy policies in bulk due to the large number of members they have.

Life insurance within super might be cheaper than standalone life insurance policies

Superannuation funds can typically negotiate group discounts on the life insurance premiums charged to their members, due to the size of their membership base.

This does not always make it cheaper than the equivalent insurance cover you could negotiate yourself, but it means the insurance premiums may well be very competitively priced. It could certainly be worth comparing the cost of life insurance taken out directly to life insurance offered by your super fund.

You may be able to increase your cover

If you’re not happy with the amount of life insurance cover your super fund provides by default, then you can usually apply to increase your cover. You may need to answer a medical questionnaire and complete a health check before any increased cover is approved.

There could potentially be tax benefits to holding life insurance in super

There could be an option available, depending on your employer, to salary sacrifice contributions to your superannuation to cover the cost of the insurance premiums.

The ATO says you can ask your employer to “sacrifice” some of your pre-tax salary or wages by having a set portion of those earnings paid straight into your super fund instead of directly to you. The ATO says this will be treated as an employer super contribution and will be taxed at a maximum rate of 15%, which it says is lower than most people’s marginal tax rate.

This also applies if you are self-employed, as you can claim a direct tax deduction on your life insurance for contributions made from pre-tax income (known as concessional contributions).

It’s important to note that any money you salary sacrifice to superannuation generally can’t be withdrawn again until you meet a condition of release, so you are locking your money away until then.

You may want to discuss salary sacrificing with a qualified independent professional such as a financial adviser before making a decision.

Along with the advantages outlined above, there are also some potential disadvantages of holding life insurance through superannuation. These can include the following:

It reduces your retirement balance

Premiums paid from your super balance will mean less money available for your super fund to invest. This could affect the amount of money that you have in your super fund at retirement. The fees for insurance could also be troublesome for people only working on a casual or part-time basis who may have a limited amount of money flowing into their account.

The Australian Government’s Putting Members’ Interests First legislation introduced changes in a bid to prevent life insurance premiums eroding retirement savings through fees and charges, and give consumers better options for how they can “opt out” of life insurance through super.

One consequence of these changes is that most workers under 25 will no longer receive life insurance within super by default upon joining a new fund—they will have to “opt in” to receive this cover if they want it.

The amount of life and income protection insurance cover may not be enough for your needs

The standard level of life insurance coverage within super is typically fairly low and isn’t specific to your circumstances. This means it may not be enough to cover your needs.

You can calculate the rough amount you may need by considering your existing debts, your long-term obligations (such as the cost of raising children) and the amount of money required to provide for your family (given their current standard of living) for a number of years.

If you find the cover through your superannuation fund is not enough, you may want to check whether you can apply for extra insurance cover, or maybe consider a life insurance policy held outside superannuation.

The income protection benefits for policies within super may be limited to covering only a certain percentage of your income for a fairly short length of time—often between two and five years.

Again, if you find the default amount of cover would not be enough for you, you can speak with your super fund to see if you can increase the cover to better suit your needs, or consider an income protection policy outside superannuation.

Some people may benefit from holding insurance within their superannuation fund as well as a separate policy externally, but this will depend on your circumstances and it may be a good idea to speak with a financial adviser for personalised advice. If you are thinking about changing your life insurance arrangements, be sure to read all important documentation carefully, including the Product Disclosure Statement (PDS) and the Target Market Determination (TMD). You may want to consider seeking suitably qualified financial advice.

Trauma insurance is not usually available through super funds

Trauma insurance, also known as trauma cover or critical illness insurance, provides a lump sum of money to cover immediate medical expenses and other financial needs when a critical illness or injury occurs. Trauma insurance is a standard component of most life insurance policies outside of super.

According to Moneysmart, super funds no longer offer new trauma insurance policies, but if you were in a super fund that offered it before July 2014, you might still have this cover. If you’re not sure, contact your super fund to find out.

You may not be able to guarantee who the beneficiary will be

When it comes to paying out a superannuation death benefit, the decision as to the distribution of the funds often rests with the trustee of the super fund. You may be able to make a binding death nomination, but you may be limited in who you can nominate.

If you need absolute certainty as to who will receive the death benefit, you may need to clarify this with your super fund or consider an external policy. According to the ATO, the form of the benefit payment and who receives it will depend on the governing rules of your super fund and the relevant legal requirements.

The life insurance payout may be delayed

There can sometimes be a delay in the death benefit being paid out because insurance payouts have to go to your superannuation fund before they go to you or your beneficiaries, and the trustee then has to determine if the condition of release has been met and identify the correct beneficiary.

This payout may be faster from policies held outside superannuation. Income protection payouts and TPD payouts can be more straightforward because you, the super fund member, are typically the beneficiary for these policies.

There could be tax implications for death benefits

If death benefits are not paid to someone who was financially dependent on you, they may be taxed on the proceeds, according to the ATO. It could be a good idea to seek advice from your accountant or financial adviser in relation to this.

Insurance cover can end

Life and TPD cover within super can potentially end if you change funds, stop making contributions or reach a certain age, according to Moneysmart. Whereas for a standalone policy, your cover typically continues as long as you keep paying the premiums, up to a certain age.

Income protection is slightly different, as it often has a cut-off point when cover ends, regardless of whether it’s taken out within super or separately.

At the end of the day, it really comes down to your personal situation to determine whether insurance within your superannuation is right for you.

If you are considering your options regarding life insurance, it may be helpful to compare the pros and cons of life insurance through super to that of direct life insurance. Similar to life cover held within super, direct life insurance pays a lump sum that could help your partner or dependents repay debt and cover the costs of living if you pass away.

On the other hand, if you don’t have a partner or dependents, it may not be worthwhile paying premiums for life cover. These are some of the pros and cons of taking out direct life insurance:

Pros of direct life insurance

• You can choose the cover that specifically meets your needs.
• You can choose to pay stepped (increase over time) or level (remain the same over time) premiums. Stepped premiums generally start out cheaper when you first become insured, which can be an advantage at the beginning to cut costs, but become more expensive as you age.
• Cover generally continues as long as you pay the premiums, unlike life insurance through super which usually ends at age 70, according to Moneysmart.

Cons of direct life insurance

• Premiums may be more expensive than what you might pay for life insurance through superannuation.
• You may need to undergo a medical or health check to get the cover.
• Pre-existing conditions would usually be covered through your default super life insurance or may only be excluded for a certain period of time, but they may not be covered at all through direct insurance.

Whether or not a life insurance or income protection insurance policy within or outside of super includes cover for COVID-19-related claims will depend on the policy you choose.

It’s often worth checking with your insurer or super fund before buying, renewing or switching your insurance to see if it provides cover for COVID-19.