Life cover in super is typically only for $100,000-$200,000 with some of Australia’s most popular super funds (though you could opt to increase that amount) when you may need closer to $1 million or more to protect your family, depending on your circumstances. It may tend to have cheaper premiums, but in some cases superannuation insurance cover is not as far-reaching as a stand-alone life insurance policy.
That being said, more than 70% of workers choose to hold life insurance cover (and sometimes total and permanent disability insurance and income protection insurance) through their superannuation fund.
Now could be a good time to consider if it’s the right option for you. Here are some of the advantages and disadvantages of having life insurance through super.
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 will mean that starting from April 2020, people aged under 25 will not 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 by the end of March.
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 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
Some super funds also include TPD insurance as well as income protection insurance. Having these policies grouped together with your life insurance through super may be cheaper than seeking insurance from elsewhere, as policies are bought 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 is certainly worth comparing the cost of life insurance if 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 are generally 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:
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 can 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 will come 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.
The amount of life insurance coverage may not be sufficient for your needs
The standard level of insurance coverage is typically $100,000-$200,000, as we pointed out earlier, which may not be enough for you. As a rough guide, actuarial firm Rice Warner estimates the life insurance needs for 30-year-old parents with children to be around eight times the family’s yearly income. You can also calculate a rough amount you may need by considering debts you currently hold, 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.
Also, the income protection benefits may be limited to covering only a certain percentage of your income for a short length of time. Again, if you find the cover would not be enough for you, you can speak with your fund to see if you can change 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.
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 Australian Tax Office, the form of the benefit payment and who receives it will depend on the governing rules of your super fund and the requirements of the relevant regulations.
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.
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, but 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
- Ability to choose cover that specifically meets your needs.
- 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.
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 you selected.
This article was originally published by Justine Davies.
Image source: Aleksandr Simonov, Shutterstock.