Is it sufficient to have life insurance through your super fund?

Co-author: Ellie McLachlan

Life insurance can be held within your superannuation fund or via an external policy – or both. What are the pros and cons of having your life insurance in your superannuation fund?

There are pros and cons with life insurance through a super fund. Often life cover in super is only for $100,000-$200,000 when you may need closer to $1 million-plus to protect your family. It may be cheaper, but often superannuation insurance cover is not as far-reaching as a stand-alone life insurance policy.

With so many workers choosing to hold insurance cover through their superannuation fund when it comes to organising group life insurance (as well as total and permanent disability/TPD insurance and income protection insurance), it’s worth considering if it’s actually a good idea.

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 can be more manageable

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 are at a stage of life that involves a home loan and family to raise then having the premiums deducted from your super account may make it easier on your cash flow.

No medical examinations are needed for (most) superannuation life insurance

If you are applying for the ‘standard’ level of insurance cover offered by your super fund, there are generally no medical exams needed. This can be an advantage if you have any health issues. Note, however, that if you want to take out the extra cover above the standard level through your super fund, a medical questionnaire and a medical exam might apply.

Super policies often include both TPD & income protection insurance

Some super funds also include TPD insurance as well as income protection insurance. Having the value of your life insurance grouped together through super can often be cheaper than seeking insurance from elsewhere as policies are bought in bulk numbers.


Super insurance might be cheaper than life insurance with other insurers

Superannuation funds can negotiate group discounts on the life insurance premiums charged to their members, due to the sheer volume of their membership. This does not always make it cheaper than equivalent insurance cover you could negotiate yourself (particularly if you are young and in excellent health) but it means that the insurance premiums may well be very competitively priced. It is certainly worth comparing the cost of life insurance you hold directly and life insurance offered by your super fund.

There can be tax benefits to holding life insurance in super

If you do not want the cost of life insurance premiums to reduce your superannuation account balance, you can arrange to salary sacrifice the cost of the premiums. This can be tax-effective for workers on at least the average income tax rate. This also applies to those who are self-employed, as they can claim a direct tax deduction on their life insurance.

Note, though, that funds you salary sacrifice to superannuation can’t be withdrawn again until you meet a condition of release, so you are locking your money away. Discuss salary sacrifice with your financial adviser before making a conscious 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:

Reduces your retirement balance

Premiums paid from super contributions mean less money available to invest. This will affect the amount of money that you have in your super fund at retirement as you’ve had to reduce your super fund amount. The cost of these premiums is amplified when you consider the compounding nature of investment returns.

The fees for insurance can be particularly troublesome for people only working on a casual or part-time basis where there’s potentially more money seeping out of the account than flowing in. The Federal Government recently announced plans to target life insurance premiums that are eroding retirement savings through fees and charges and give consumers better options for how they can ‘opt out’ of insurance. AustralianSuper was the first super fund to stop automatically charging new members under 25 for life insurance.

The amount of life insurance coverage may not be sufficient for your needs

The standard level of insurance coverage may not be enough for you, so check whether the fund allows you to apply for extra insurance cover, or consider a second life insurance policy, held outside superannuation. As well, the income protection benefits may be limited to covering only a certain percentage of your income for a short length of time. A second income protection policy, outside superannuation, may be needed to cover the shortfall.

Trauma Insurance is not 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. A serious illness or injury causes more than just physical and emotional turmoil – it has the potential to cause severe disruption to your finances as well. Having income protection insurance in place will cover a portion of your income if you cannot work due to illness/injury, however, it doesn’t cover immediate medical and financial needs. Trauma insurance is a standard policy in standard life insurance policies outside of super funds.

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 are limited in who can be nominated. If you need absolute certainty as to who will receive the death benefit, a super fund insurance cover may not be for you.

The life insurance payout may be delayed

Because the insurance payouts have to go to your superannuation fund before they go to you, and the Trustee then has to satisfy itself as to the correct beneficiary, there can sometimes be a delay in the death benefit being paid out. Income protection payouts and TPD payouts should be more straightforward.

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. You should seek advice from your accountant in relation to this.

Income protection policies don’t last for too long

Most income protection policies inside super provide for only two years’ worth of income protection – what if you cannot work for several years longer than that?

At the end of the day there is no right or wrong answer when deciding whether or not to have life insurance cover in your super fund. It really comes down to your personal situation and determining what will be best for you. The other two options, of course, are to buy life insurance through a financial adviser or to buy life insurance direct. Find out more about advised life insurance and direct life insurance.

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