What are the advantages and disadvantages of having life insurance through your super fund?

Life insurance can be held within your superannuation fund, via an external policy or both. What are some differences between these options?

Life insurance held within super is extremely widespread, with more than 70% of Australians who do have life insurance holding it through their super fund according to Moneysmart (often along with total and permanent disability insurance and income protection insurance).

Life cover in super is typically only for relatively small amounts (though you can opt to increase your cover), with financial research firm Rice Warner stating in its Underinsurance in Australia 2020 report that the median default life insurance cover within super meets “approximately 65% to 70%” of the basic cover needs of average households, “but a much lower proportion” for parents with dependent children.

In addition, Moneysmart notes that while a life insurance policy held within super will tend to have cheaper premiums than one taken out separately, the level of cover it offers may be more limited.

Whether you’re comparing super funds or evaluating your life insurance options, now could be a good time to consider whether insurance within super is the right option is for you. Here are some of the possible advantages and disadvantages associated with it.

Advantages of life insurance through super

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, but if you have other financial commitments such as a home loan or a family to raise, then having the premiums deducted from your super account may make it easier on your immediate cash flow, though it would still come out of your retirement nest egg.

It’s worth keeping in mind that newly-passed legislation means that since April 2020, people aged under 25 no longer receive default life insurance cover through their super when they join a new fund, unless they’re working in a dangerous job. This means they will need to contact their fund to request this insurance if they want it. Insurance will also be cancelled on super accounts with balances less than $6,000 that haven’t received contributions for at least 16 months, unless the account holder ‘opts in’ to keep their cover.

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 funds may automatically accept you for cover without requiring a health check, according to Moneysmart. Note, however, that if you want to take out extra cover above the standard level through your super fund, a medical questionnaire and a medical exam might apply. Moneysmart recommends checking the Product Disclosure Statement (PDS) of your insurance carefully to see whether you’ll be covered for any existing medical conditions you may have.

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

Some super funds also include TPD insurance and income protection insurance along with their life insurance cover, with income protection within super often also being referred to as salary continuance insurance. Having these policies grouped together with your life insurance through super may be cheaper than seeking insurance from elsewhere, as super funds can buy policies in bulk numbers.

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 equivalent insurance cover you could negotiate yourself, but it means that 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

Moneysmart advises that if you aren’t happy with the amount of life insurance cover your super fund provides by default, you can usually apply to increase your cover. However, it warns you may have to answer a medical questionnaire and complete a health check before your increased cover is approved.

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

There could be a few options available, depending on your employer, to salary sacrifice contributions to your superannuation to cover the cost of these premiums. According to the Australian Taxation Office (ATO), you can agree with your employer to ‘sacrifice’ some of your salary or wages by having a set portion of them 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 adds is lower than most people’s marginal tax rate. This also applies to those who are self-employed, as they can claim a direct tax deduction on their life insurance for contributions made from pre-tax income (known as concessional contributions), according to MoneySmart.

Note, though, that money you salary sacrifice to superannuation can’t be withdrawn again until you meet a condition of release, so you are locking your money away. You may want to discuss salary sacrificing with a qualified professional such as a financial adviser before making a decision.

Disadvantages of insurance through superannuation

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 super contributions will mean less money available for your super fund to invest. This may affect the amount of money that you have in your super fund at retirement.

The fees for insurance could 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 Federal Government introduced changes in 2019 that came into play in April 2020, 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 insurance. One consequences 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 coverage may not be sufficient for your needs

The standard level of life insurance coverage within super is typically fairly low compared to the needs of some Australians, often sitting at around $100,000 to $200,000. This means it may not be enough for you, depending on your circumstances. As a rough guide, the Rice Warner report referred to above estimated the life insurance needs for 30-year-old parents with children to be around $561,000 per parent.

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

Bear in mind, too, that 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, according to Moneysmart. Again, if you find the default amount of cover would not be enough for you, you can speak with your 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 externally (two policies), but this will depend on your circumstances and it may be a good idea to speak with a financial adviser for personalised 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 policy in standard component of most life insurance policies outside of super funds. 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 in your fund. Contact your super fund to find out if you’re unsure.

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, however, 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

Because the 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, there can sometimes be a delay in the death benefit being paid out. This payout can sometimes 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.

Cover can end

According to Moneysmart, life and TPD cover within super can potentially end if you change funds, stop making contributions or reach a certain age, whereas for a standalone policy, your cover normally continues as long as you keep paying the premiums. 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.

Pros and cons 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 die. 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 have the ability to choose cover that specifically meets your needs.
  • You can choose to pay in stepped (increase over time) or level (remain the same over time) premiums. Stepped premiums generally start out cheaper when you first became insured, which can be an advantage at the start to cut costs, but become more expensive over time 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 could be more expensive than what you might pay for insurance through super.
  • 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 insurance or may only be excluded for a certain period of time, but they may not be covered at all through direct insurance.

Does life insurance within super include cover for COVID-19?

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. Moneysmart advises checking this point with your insurer or super fund before buying, renewing or switching your insurance. It also warns that income protection insurance “doesn’t cover you for lost income because you are stood down or become unemployed”.

Learn more about Super

If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.

Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group specified above.

This article was originally published by Justine Davies. It was reviewed by our Sub Editor Tom Letts before it was updated, as part of our fact-checking process.

Image source: Aleksandr Simonov, Shutterstock.


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