Life Insurance Inside Superannuation: Pros and Cons

Published: June 14, 2019

Most Australians have some life insurance and TPD through their superannuation, because it is automatically added. However, it's crucial that you regularly review whether the cover amount and policy type still suit your unique requirements; especially after a significant life event. For example, getting married or divorced, starting a family or changing jobs.

Please contact your superannuation if you recently received a letter from the ATO stating that your insurance will be cancelled due it being a small, inactive fund.

Compare Life Insurance Quotes Online

Free Comparison Free Comparison
Customised Quotes Customised Quotes
No Hidden Fees No Hidden Fees
Calculating your quotes
Your online insurance quote will be ready in just a few seconds.

How does super life insurance work?

A life insurance policy taken out through your superannuation works differently than an individual policy purchased outside of super. Key differences include: Premiums are paid from your super fund, benefits and features might be limited and claiming could be delayed because you’ll need to meet all the conditions of release.

Life insurance pays a lump sum benefit to your loved ones when you die or get diagnosed with a terminal illness. Super funds generally make provisions to help members’ cover part of their insurance needs through their default cover. Meaning, a death benefit and Total and Permanent Disablement (TPD) policy are generally automatically added when you join a super fund. Some funds also including income protection insurance.

Beware of losing your insurance inside superannuation

As of 1 July 2019, life insurance inside super will be cancelled if you have a balance below $6,000 and your account has been inactive for more than 16 months (no contribution or roll-over). The trustee of your fund will transfer your inactive super fund to the ATO, where it will be consolidated with your active accounts.

How to check if you have insurance inside your super

You can check your annual super statement or access your super account online to find out what life insurance you have inside your superannuation. When doing so, remember to check:

  • What type of coverage you have,
  • The amount of cover you have and
  • How much you’re paying for the cover.

What sort of insurance covers are available inside super?

Australian superannuation funds typically offer 3 main types of insurance inside super:

Death cover: A lump sum amount gets paid to your nominated beneficiaries when you die.

TPD Insurance: You receive a lump sum benefit if you are totally and permanently disablement, due to a sickness or injury, and can no longer work in Any occupation for which you are reasonably qualified for by education, experience or training.

Income protection: Provides a monthly benefit when you are unable to work for longer than your waiting period because of an accident or illness.

As of the 1 July 2014, Own occupation TPD and Trauma Insurance are no longer available through superannuation, including Self Manages Super Funds (SMSF).

Life insurance inside vs outside of superannuation

Criteria Inside super Outside super
Premiums Premiums are paid from your superannuation account, so you have no out-of-pocket costs. Premiums are paid from your after-tax income, via credit card or direct debit.
Cover types Life insurance, Any occupation TPD and income protection. Full range of life cover options including death cover, TPD, trauma insurance and income protection.
Tax on benefits A death benefit paid to your financially dependent beneficiaries is generally tax-free. If paid to non-tax dependent beneficiaries, then benefits can be taxed up to 31.5%. Death benefits paid to your beneficiaries are generally tax-free.
Retirement savings Because life insurance premiums are paid from your super fund, it could reduce your retirement savings. Your retirement savings remain unaffected by your insurance premiums.
The above table is a general guide only, and you should consult an insurance broker and taxation specialist before making any decisions.

Get help from an insurance broker

Why hold Insurance in Super?

Superannuation life insurance provides hassle-free cover as it automatically includes death cover and TPD insurance, with the option of adding income protection. The biggest reason people take out insurance through Super is that there are no out-of-pocket costs - premiums are paid from the fund and not your taxable income.

Is insurance through super worth it?

Whether life insurance inside superannuation is worth it for you, depends on you and your family’s specific requirements. However, it might be more challenging to claim life insurance inside super because you’ll need to meet the insurance company’s terms and conditions as well as the SIS conditions of release.

To determine whether a superannuation life insurance policy is the right option for you, ask yourself whether the coverage you have is enough to protect yourself and your family should you die or be unable to work due to illness or injury.

Is it wise to pay life insurance via your superannuation?

Life insurance premiums inside superannuation get paid from your fund, so you have no out-of-pocket costs. However, it’s important to be aware of the potential erosion of your retirement savings.

Life insurance through super pros and cons

Advantages of having super life insurance policies Disadvantages of life insurance through superannuation
Generally, more convenient and easier to manage. Your insurance could be cancelled if your fund is below $6,000 and has been inactive for the last 16 months
No out-of-pocket costs because premiums get paid from your superannuation account rather than debited from your personal account. Paying your premiums through your super fund may mean you have less money for when you retire.
Usually includes death cover, Any TPD and income protection insurance. Own TPD and Trauma insurance are not available for purchase through superannuation.
Life insurance premiums paid by your superannuation are generally tax deductible to the fund at a rate of 15%. If your beneficiaries are not tax-dependents, they might have to pay up to 31.5% tax on the death benefit they receive when you pass away.
The benefit payout might take longer because you would need to meet the policy terms and conditions, as well as the SIS legislation condition for release.
Generally, easier to dispute beneficiary nominations, so there is less certainty that your loved ones will receive your death benefit.
Income protection premiums might be tax deductible to your fund at 15%. Income protection inside super is restricted to indemnity cover.
You might lose built-in income protection benefits, which are usually available in policies held outside of super, for example, accommodation benefit.

How can you benefit more from insurance inside Super?

Recently, insurers have taken some steps to make policies taken out through super more flexible with several different ownership structures, including:

Flexible policy linking

Flexible policy linking allows you to hold a combined policy (where life insurance is combined with trauma and/or TPD insurance) but split the ownership between self-owned and superannuation owned.

Flexi linking allows you to hold life insurance within superannuation as well as trauma and Own occupation TPD outside of super, but still, take advantage of a combined policy.

Split TPD

Split TPD allows you to split the ownership of TPD between self and super owned. This enables you to hold the Own occupation portion of your TPD cover outside of Super and Any occupation within Super.

Split Income Protection

There are a few life insurance companies in Australia that will allow you to split your income protection between personally owned and through your super. By splitting income protection ownership, your premiums are paid from your superannuation account, and you can access the benefits only available from policies held outside of super.

Please contact an insurance broker to help you.

Compare life insurance quotes online & speak to an insurance specialist

How to claim superannuation insurance

To lodge a claim for insurance through your superannuation, you will generally need to notify the super fund and request the appropriate claim forms. For a claim to be paid, you'll need to:

  1. Satisfy the insurer's definition of a claimable event as per their terms and conditions. If approved, the claim will then be paid to the trustee of your super fund.
  2. Meet the rules of your Trust deed.
  3. Meet the conditions of release as per the Superannuation Industry Legislation (SIS):
    • Death and diagnosis of a terminal illness.
    • For TPD it’s “permanent incapacity”.
    • With income protection, it's "temporary incapacity".

The claiming process can be long and confusing, so it might be best to enlist the help of an insurance specialist.

Frequently asked questions and answers

Is life insurance through super tax deductible?

Life insurance premiums paid by your super fund may be fully tax deductible to your fund. While a death benefit is usually tax-free, there might be tax implications should the benefit be paid to a non-tax dependent, like an adult child or business partner.

How to remove life insurance from super?

Generally, your employer's default super fund must offer a minimum level of life insurance. Your superannuation's website will explain how you can increase, decrease or cancel your life insurance coverage.

Before you decide to cancel, increase or decrease your superannuation life insurance, make sure you know how much cover you need to protect you and your family.

Can I have both a self-owned and a super life insurance policy?

Yes, you can have multiple life insurance policies, purchased through your superannuation, directly from the insurer or through an insurance broker. If it's the right option for you will depend on your requirements and whether you need extra coverage because you have a family or outstanding loans and debts.

Do all super funds have life insurance?

Yes, all superannuation funds must add default insurance coverage of death and TPD for their members. However, if you have not contributed to your fund in the last 16 months and it's below $6,000 your insurance might get cancelled.

Thanks for reaching out!

We will review your comment and get back to you as soon as possible. If your inquiry is urgent, please use the phone number listed at the top of this page.

Talk to you soon.

Ask an Expert?

14 Comments

  • Pam Gobaira |

    I acquired a workplace injury in 2012 and was receiving WorkCover payments for the maximum time, approximately 3 years. Was l eligible for payments from my superannuation provider through income protection cover?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Pam. I hope you’re doing well.

      Whether a benefit from your income protection policy through your Superfund would have been or is valid depends on a variety of factors, for example, whether your policy was active and up to date, if you met the insurer’s definition of a claimable event, if the trustee of your super is satisfied that you meet the definition of temporary incapacity, and more.

      Please contact your superannuation directly for assistance.

  • John |

    My wife has terminal cancer and insurance through her superannuation. She now lives in New Zealand and wants to pay out her life insurance into her superannuation. How is this best done?

    Thanks

    • SPECIALIST
      Anneke Van Aswegen |

      H John.
      I’m so sorry to hear about your wife’s diagnosis.

      To claim life insurance from your superannuation, you’ll have to contact the fund and request that they send you the relevant claim forms, as well as which supporting information is needed (e.g. Histology reports). Once the claim forms and supporting evidence has been provided (take note, they may ask for a second medical opinion), the following will generally happen:
      – The insurer must confirm that your wife has met the definition of a claimable event. Take note, a life insurance payout for terminal illness generally requires that a medical examiner is of the opinion that your wife has less than 12 or 24 months (depending on the insurer) to live.
      – The insurer will then pay the trustee of your wife’s superannuation fund if the claim was valid.
      – The trustee will determine whether your wife meets the conditions of release as per the Superannuation Industry Supervision Act (SISA)
      – If the trustee confirms that conditions have been met, the lump sum payout should take effect.

      Best of luck to you and your family.

  • Cherie |

    Hi there!
    My super funds have been inactive for over 24 months but I do have over $6000 in them so will this new government change affect my default insurance cover?
    Although I have ATO help super which I think is just below the $6000, so what shall I do?
    Thanks

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Cherie.

      Please contact your super funds’ directly in regards to whether you’re in danger of losing your insurance held inside super. Generally, your fund needs to be both below $6,000 AND inactive (not received a contribution or rollover in the last 16 months) before you’re at risk of having your insurance cancelled. However, it’s best to contact your funds for confirmation.

  • coast & country insurance consultants Pty Ltd |

    Does the ATO have a letter to ask if a client wants to retain their life insurance inside their superannuation?
    If so can you send me a copy, please?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Paula.

      You need to contact your superannuation fund directly to make it known you want to keep the life insurance you have inside your fund.

  • Belinda |

    Hi. I am looking to claim on the TPD insurance part of my super as I can no longer work due to injury. Does this mean that I will have no super when I hit retirement age or is a TPD payout separate from my super?

    • SPECIALIST
      Anneke Van Aswegen |

      Hello Belinda. I’m sorry to hear about your injury.

      Claiming TPD inside super may take longer because there are some additional steps you’ll need to comply with, for example, the condition of release under the SIS legislation. However, the payout from a TPD claim is paid by the insurance company and not monies held inside your superannuation, so a claim will not reduce your retirement savings.

  • Jo |

    I have lost my insurance in super. Can I get it back? I’m self employed, so I have not put money in regularly. I will now have it direct debited.

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Jo.

      If you had a group insurance policy inside super, you can still reinstate your insurance if it was cancelled due to the Protecting Your Superannuation (PYS) Package. However, you’ll have to do it within 60 days of cancellation. If the 60 days have already passed, you can usually still reinstate your insurance but might need to complete a full medical assessment. Please contact your super fund for further details.

  • Tamara |

    Hi. Was life insurance automatically included with superannuation around 1997 for someone under 25yrs of age?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Tamara.

      Whether life insurance was automatically included inside someones super in 1997, can only be verified by the super fund itself. Please contact the fund directly to inquire.