Should you get life insurance through super?

Life insurance through superannuation is common in Australia. According to ASIC, more than 10 million super accounts have insurance.

One of the big reasons for this is most super funds automatically provide life insurance cover when you open an account.

This means a lot of people are paying a premium out of their super balance every month and might not even know it.

While there are benefits to having life insurance through super, there are some potential drawbacks as well. 

This guide covers the ins and outs of life insurance through super, and alternatives that could save you money.

What are the options for getting life insurance?

There are two main ways to buy life insurance in Australia:

• Through your super fund: In most cases, when you join a super fund you’ll get term life insurance, TPD cover and income protection insurance by default. With this option, your premium is deducted from your super balance. If these default life insurance policies don’t offer adequate cover for your health circumstances, it’s possible to purchase additional retail life insurance policies through your super fund as well, and this may be tax deductible - though you must check this with your financial advisor. 

• Outside of super: This is known as ‘retail life insurance’ and it’s where you buy a policy directly through an insurer or broker, rather than relying on the default cover within your super fund. Generally speaking, you have access to more cover types and features, and premiums are paid for out of pocket. 

You can also ‘superlink’ your life insurance, which is where you split a retail life insurance policy with a portion that sits inside your super fund and the remainder outside of your super fund.

This remainder is paid for out of your own pocket. 

Superlinking is a way to access some of the benefits of retail life insurance and super life insurance at the same time.

You can find out more about superlinked life insurance here. 

Is life insurance compulsory with superannuation?

No, life insurance through super isn’t compulsory. Most super funds offer life insurance by default though, which means you’ll be paying for cover unless you opt out or cancel your policy.

If you have more than one super account (like around four million other Aussies)*, you could be paying for multiple life insurance policies without even knowing it. 

That’s why it’s a good idea to review your super fund/s and make sure you’re not paying for cover you don’t need, or cover that’s not right for your situation. You can check your super accounts by logging into myGov. 

What are the pros and cons of relying on default life insurance through super?

Life insurance through super comes with a few important pros and cons to consider.

Pros:

• Pre-tax premiums: Your premiums are paid using pre-tax money from your super balance.

• Frees up cash: Because you don’t pay out of pocket, you don't have to worry about setting aside cash to pay for your premiums.

• Premiums may be cheaper: Super funds buy policies in bulk and can sometimes get group discounts, which could lower the cost of your premium.

• No application needed: Life insurance through super is usually automatically given to fund members, so you don’t have to fill in an application or jump through any medical testing hoops to get covered.

Cons:

• Less choice: Generally speaking, you can’t access the full range of policy types through super. One example is trauma insurance, which pays a lump sum if you can't work due to a serious illness or injury.

• Limited cover: With life insurance through super you’ll usually be given an automatic level of cover, which might not be enough cover or the right type of cover for your situation.

• Reduces your retirement savings: Because premiums are deducted from your super balance, they can eat into your retirement nest egg over time.

• Delayed payouts: Typically benefits are paid to your super fund, which are then released to you or your beneficiary. This can slow down the time to pay out claims.

• Your benefit payout may be taxed: If a lump sum payment is going to someone other than a dependent, like your spouse, some funds will tax your payout.

• You could be left uninsured: If you switch funds or your employer's contributions stop coming in, your policy could be cancelled. Super funds are required to cancel insurance if an account has been inactive for 16 continuous months.

• Expiration age: Cover may end at a certain age (usually 65 or 70).

Is life insurance cheaper through super?

Life insurance can sometimes be cheaper through super, because super funds often get a bulk discount on policies and can pass those savings onto fund members. 

You also effectively save on your premium because life insurance through super is paid in pre-tax dollars.

That said, benefit levels tend to be lower and you generally have less choice about your cover when compared to buying a retail policy directly through an insurer or broker. 

So even though you might be saving money upfront, it could end up costing you in the long run if you ever have to make a claim and the payout isn’t enough to support you or your loved ones.

What’s normally covered with default life insurance via superannuation?

Life insurance via superannuation typically includes three types of cover:

1. Term life insurance: Also known as 'life cover' or 'death cover', this is probably what most people think of in relation to life insurance. It pays a beneficiary, such as your partner, a lump sum if you pass away or are diagnosed with a terminal illness.

2. Total and permanent disability (TPD) insurance: TPD pays a lump sum if you can't work in any capacity again, due to permanent illness, injury or disability. 

3. Income protection insurance:This type of cover may pay up to 70% of your usual income, usually monthly, if you can't work temporarily due to illness or injury. In some cases, this amount may be less and it may not be enough to cover your expenses.

Across those three types, different super funds offer different levels of cover. 

So if you’ve already got a policy through your super fund, it’s worth checking it to see what you’re covered for and whether it’s suitable for your needs. 

Is life insurance through super tax deductible?

Generally no, default life insurance premiums aren’t tax deductible if they’re paid from your super balance. Purchasing retail insurance policies through your super fund may be deductible. It’s wise to check this with your financial advisor.

You also can’t claim a tax deduction on term life insurance, TPD insurance or trauma insurance bought outside of super.

The good news is you can usually claim a tax deduction on premiums for income protection insurance bought outside of super. 

Should I get life insurance through super?

The short answer is, it depends on your specific life circumstances (so, really, there’s no short answer).

Are TPD payments from super taxable?

Any super contributions are taxed at the lower tax rate of 15%. If you have taken out TPD cover through your super, your premiums are deducted from your super account balance and have therefore already benefited from the lower tax rate

How do I claim TPD from super?

If you wish to make a TPD claim, your super fund should be able to guide you through the process. Chances are, they’ll need:

• Any medical records related to your permanent injury or illness

• Details on your occupation and the kind of tasks it involves

• Any proof of income, tax or financial statements to assess your current income.

Do you have an employer regularly making contributions into your super account?

If your super account has been inactive for a while or might be in the future, keep in mind your super fund will cancel your policy after 16 months of inactivity – leaving you uninsured.

And if you want more choice and flexibility, life insurance outside of super could give you access to more cover types and benefits. You could also save money in the long run. 

Want to compare cover available through your super with some other options? 

You can easily check coverage and prices with support from a Compare Club life insurance specialist. 

Matthew Lang is the general manager of life insurance at Compare Club. Matthew leads a team of dedicated professionals who are passionate about helping individuals and families make informed decisions about their life insurance needs. Whether it's finding the right coverage for your specific circumstances, comparing policies, or optimizing your existing policy, Matthew and his team are here to provide expert guidance and support.

Meet our life insurance expert, Matthew Lang

Matthew's top life insurance tips

• 1

  Identify what you want out of life insurance before you buy. Knowing the purpose of your life cover will help you choose a policy that meets your needs.

• 2

  It's easy to assume that the sole purpose of life cover is to leave money behind for your family, but there's more to it than that.

• 3

  Life insurers like those on our panel pay an average of 97% of claims in full.

• 4

  There are different types of life insurance, including term life insurance, income protection, trauma cover and total and permanent disability cover.