Can You Pay For Life Insurance Through Your Superannuation?
Life insurance through super allows you to pay for life insurance premiums using pre-tax dollars deducted from your superannuation balance. Read more.
by Gary Andrews
Last update 15 Mar 2021
Life insurance through super is an appealing prospect for many Australians, who like the idea of paying a life insurance premium using pre-tax dollars. However, there is more to life insurance through super than meets the eye. It's important to understand the pros and cons of life insurance both in and out of super before making a decision.
If you are a member of your employer's default superannuation fund, you probably have life insurance---even if you don't realise it. These funds are required by law to offer a minimum level of life insurance, which means that unless you've cancelled the insurance, you're paying for it.
Many Australians are surprised to learn that they're paying life insurance premiums through their super because they don't see the payment coming out of their bank account. Instead, premiums are deducted from their super balance.
Types of Life Insurance Through Super
Normally there are three types of life insurance available through a superannuation fund.
Trauma insurance and 'own occupation' TPD insurance is not available through superannuation.
To learn more about the options available through your fund, download or request its Product Disclosure Statement (PDS). This will give you details on who the insurance underwriter is and information about the available life insurance policies.
Although it seems as if there are a long list of disadvantages to life insurance through superannuation, simply taking a proactive approach can help you get more value from your life cover. Here are a few steps you can take.
Consolidate your super funds
If you have multiple funds, you may have multiple life insurance policies. That means you could be paying twice the premiums. Combine your funds to reduce your payments.
Evaluate the amount of cover you need
Consider how much money your loved ones would need to cover debts and maintain their standard of living without your financial contribution. Compare this amount to the amount you're insured for to see if it is enough.
Top up your super to compensate for premium payments
If you're worried about a dwindling superannuation balance, consider topping up your super with additional contributions throughout the year. Be aware of any contribution caps that may apply.
Review your life insurance
It's a good idea to review your life insurance needs at least once a year or whenever your financial situation changes. If you get married, divorced, move house, change jobs, or have a child, it could affect the amount of cover you need.
Compare policies in and outside of super
Shop around to see what policies are available outside of super and compare them to what you've got.
Life insurance outside of superannuation tends to be less restricted, though it may cost slightly more and you'll have to pay a regular premium from your net income.
Types of Life Insurance Outside of Super
There are four main types of life insurance available outside of super:
Life insurance outside of super often comes with additional benefits, such as premium-free child cover, a bonus financial adviser benefit, or an advance payment for funeral expenses. Cover may also have a higher policy expiry age, with some policies remaining valid until your 100th birthday.
The pros and cons of life insurance outside of superannuation are very different to those of life insurance inside superannuation.
To decide which method of life insurance is right for you, weigh up the pros and cons and decide what matters most to you. Is it having a broader range of choice and higher benefits or the ability to pay for life cover out of your super balance?
Life insurance through super is generally best for people with restricted cash flow who would like the peace of mind of knowing that they have some level of cover. This may be young singles, couples, or people with debts but no dependents.
Life insurance through super is generally suited to those who need a higher level of life cover than what is offered through superannuation. It may be a good fit for people who need a broader scope of life cover or who wish to leave their superannuation balance untouched. This may be parents with children under 18, or older adults with debts whose children have left the home.
If you're unsure which type is right for you, consider Superlink (also called Flexilink), which allows you to link a policy within your super to a policy outside of super, effectively creating a compromise. You could also split your life cover across separate policies both inside and outside of super.
A beneficiary is the person, persons, or entity who will receive your life insurance payout. It's an important decision and one that should not be taken lightly. When you nominate a beneficiary, be sure to let them know as they will probably be the one who has to make the claim.
Life insurance through super
The death benefit of life insurance through super is your super account balance plus any life insurance payment. There are two types of beneficiary nominations you can make for life insurance through super. If you fail to nominate a beneficiary, the super funds' trustee has the final decision on who will receive the death benefit.
Life Insurance Outside of Super
As the policy owner, you are able to choose the beneficiary or beneficiaries of your life insurance payout. Most insurers allow you to nominate up to five beneficiaries, who can be people or entities, such as a charity or organisation.
You can also nominate a contingent beneficiary as a backup if one of your nominated beneficiaries should pass away before you do. Remember that your will cannot override your life insurance nomination.
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This guide is of an informative nature only and not representative of Compare Club products. It should not be taken as medical or financial advice. Check with a financial professional before making any decisions.