Life Insurance Inside Super: The Pros and Cons You Need to Know

Published: March 7, 2018

You can take out a life insurance policy through your superannuation fund, including your Self-Managed Super Fund (SMSF). But, before you do, you should be aware of the potential erosion of your retirement savings as funds are being used to pay for insurance premiums and that benefits may be difficult to access because you’ll need to meet the conditions of release. Also, life insurance through super does not allow for Own occupation TPD or Trauma Cover.

If you're reviewing your insurance coverage or checking to make sure you have sufficient superannuation life insurance, then it's time you compare the pros and cons of purchasing life insurance through your super fund.

Most Australians have some life insurance through their superannuation policy but are not confident that it's enough to cover them and their family should they pass away or be diagnosed with a terminal illness.

You might be in danger of being underinsured. Have you checked to see whether your life insurance through Super is enough to cover what your family will need should you have to claim?

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How does life Insurance through superannuation 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.
  • The super fund becomes the policy owner. And maybe named the trustee who pays out the benefits to your beneficiaries.
  • A condition of release according to the Superannuation Industry Supervision (SIS) Act needs to be met for you or your beneficiaries to receive the benefit.
  • Certain built-in benefits such as funeral advancement, financial planning benefit, and free child cover may not be available.

Why hold insurance in super?

Premium affordability is often the key motivator that attracts individuals to place their life insurance inside superannuation. Premiums can be paid from existing superannuation savings, non-concessional contributions, or salary sacrifice arrangements in the case of employees, or tax-deductible contributions by the self-employed. This allows life insurance to be put in place with little if any impact on a member's cash flow.

  • Cheaper premiums: Super funds usually purchase life insurance in bulk and pay premiums annually.
  • Tax perk: Premiums are paid for out of your superannuation balance and not your taxable income.
  • Easy to manage: Premiums are automatically deducted from your fund.
  • No medical exams: Life cover in super is generally taken as a group policy.
  • Death benefits are generally tax-free: If paid to your financial dependants.

What types of life insurance are offered by super funds?

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

  • Life Insurance: A death benefit paid to your nominated beneficiaries.
  • TPD Insurance: Total and permanent disablement are only available for Any occupation as at 1 July 2014.
  • Income protection: Usually referred to as salary continuance insurance

As of the 1 July, 2014, Own occupation TPD and Trauma Insurance are no longer available as part of your superannuation fund, including your SMSF.

How to check the insurance you have through 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.
  • How much you’re paying for the cover.

When reviewing the insurance coverage you have inside super, ask yourself whether it’s enough to protect yourself and your family should you be unable to work due to illness or injury or pass away suddenly.

Special policy options

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

Flexible policy linking

Flexible policy linking allows you to hold a combined policy (where life, trauma, and TPD is combined into one policy) but split the ownership between self-owned and superannuation owned.

This 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 will enable you to hold the Own occupation portion of your TPD cover outside of super and Any occupation within super.

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Self-owned life insurance vs Superannuation life insurance

There are three main ways you can get life insurance coverage:

  1. Through a broker who provides you with personalised information based on your unique requirements.
  2. Directly from the insurer.
  3. Through your Super Fund.

Life insurance is generally purchased to assure that your beneficiaries will either receive a lump sum or stream of money should you pass away.

Superannuation is a way to help you save money for your retirement, with all employers being required to place a certain amount of your wages into the account every pay cycle.

Superannuation can be a great way to hold life insurance for the benefit of the funds' members and dependents. However, it's essential that you understand both the benefits and implications of holding life insurance through super.

Life insurance inside vs outside superannuation

Life Insurance Inside super Outside super
Premiums Premiums paid from your pre-tax superannuation balance. Premiums paid from your after-tax income.
Cover types Life insurance, Any occupation TPD and income protection. Full range of life cover options including life cover, TPD, Trauma and Income Protection insurance.
Tax on benefits Benefits paid to your financially dependent beneficiaries are generally tax-free. If paid to other non-dependent beneficiaries then benefits paid can be taxed up to 31.5% Benefits paid to your beneficiaries are generally tax-free.
Retirement savings Life insurance premiums paid reduced your retirement savings. Your retirement savings remain unaffected by your insurance premiums.
The above table is a general guide only, and you should consult a taxation specialist before making any decisions.

Life insurance through Super pros and cons

Advantages of having super life insurance policies

  • Generally, more convenient and easy to manage because premiums get paid from your superannuation account rather than debited from your personal account.
  • Lower premiums compared to an individual life insurance policy because Super Funds can buy policies in bulk and receive a discount, which is then passed on to you.
  • Tax benefits might be available, as premiums are paid from your Super account and not from your after-tax income.
  • Might get guaranteed acceptance without having to provide any medical or personal information.
  • Can possibly increase your cover amount paid for with your Super. However, you need to speak to the fund and see if you qualify for additional cover and then you might have to answer some lifestyle, health and medical questions.
  • Usually includes TPD and Income Protection cover.

Disadvantages of life insurance through superannuation

  • The benefit payout usually takes longer because the insurer pays your benefit to your super fund and then the fund has to distribute the payout to your beneficiaries.
  • There may be tax implications for your beneficiary receiving the benefit. If your beneficiaries are not financial dependents, then they might have to pay tax on the death benefit.
  • There’s a possibility that the benefit amount might not go to the person(s) you want it to go to. It’s important to review your Superannuation’s binding nominations policy.
  • Reduced benefit amount than if you had purchased your policy through a broker or directly from the company because a superannuation fund will usually only cover you for an amount based on a multiple of your salary.
  • Reducing your retirement savings: Paying your premiums through your super fund may mean you have less money for when you retire.
  • Might have to make voluntary contributions to your superannuation if there isn’t enough money in your Super account to pay for premiums.
  • Life cover might stop when you reach a certain age, usually between 65 and 70-years-old.
  • Trauma cover is not available within a super life insurance policy.
  • Restricted salary continuance. Income protection benefit is generally only paid for two years.
  • Cover may cease if your employer stops paying fund contributions or change funds.

Is insurance through super worth it?

Superannuation life insurance provides hassle-free cover and cheaper premiums, with the option of adding total permanent disability (TPD) and income protection without a fuss. In theory this sounds great. However, there are some drawback to relying solely on life insurance inside your super fund. It's best to weigh the pros and cons before deciding whether a superannuation life insurance policy will provide appropriate protection for you and your family.

The savings gap between insurance inside and outside super is closing fast

According to the latest Underinsurance Australia report, recently released by Rice Warner, super funds generally make provisions to help members’ cover part of their insurance needs through their default cover.

The report estimates that a 30-year-old parent with kids should have life insurance coverage:

  • 8 times the family income for life cover;
  • 4 times for TPD insurance, and
  • 85% of family income for income protection insurance.

However, “the median cover level is estimated to be approximately $143,500, which is only twice the median household income”. Meaning the median default cover of your super fund might only meet about 50% of your basic-level life insurance needs.

It's a terrifying prospect to know that if something were to happen to you, your loved ones might only be able to maintain half of the lifestyle they've grown accustomed to and will possibly have to relocate to a smaller, more affordable house. Of course, this all depends on if you have savings put away or no longer need to make mortgage payments or have outstanding debts.

Is it wise to pay life insurance via your superannuation?

To determine whether a superannuation life insurance policy is the right option for you is to consider how much cover you need and then find out if your super fund offers that amount of cover, how quickly it will pay out and whether it will be paid out to your nominated beneficiaries and what tax implications might be involved.

Carefully review your super fund's product disclosure statement (PDS) and make sure you know exactly how much you're covered for and if you need to increase your level of cover to meet your needs.

Can I have both an individual and a super life insurance policy?

Yes, you can have life insurance both through your superannuation and purchased directly or through your broker. If it’s the right option for you will depend on your personal circumstances and whether you need extra coverage because you have a family or outstanding loans and debts to pay.

Is life insurance through super tax deductible?

Life insurance premiums paid by your super fund may be fully tax deductible to your fund. Meaning, the fund trustees may claim a tax deduction. The trustees of the super fund can usually also claim deductions for income protection premiums, but TPD premiums may only be partially tax deductible depending on the definition of TPD chosen.

Although tax deductibility of premiums within superannuation is attractive, it hides a sting in the tail - taxation of death benefits to non-dependants.

When a lump sum death benefit is paid from a superannuation fund to the member, it is necessary to understand that there may be a tax liability. The amount of tax depends upon the age of the member, service period start date, and date of death, and who the beneficiary is. It should be noted that taxation dependents are different to superannuation dependants. Under taxation law, children over 18 are non-dependants unless financially dependent or can demonstrate an interdependency relationship.

You should carefully consider all of the advantages and disadvantages when determining if life insurance is best purchased inside or outside superannuation.

How can I claim on insurance through super?

Should you pass away or be unable to work for a specific period of time due to sickness or injury and need to claim, you or your nominated beneficiary must notify the super fund and ask to be sent all the required claim forms. 

The claim will then be paid by the insurer to the trustee of your super fund. Under the Superannuation Industry Supervision Acts (SISA), the trustee is then required to pay the benefit amount to an eligible beneficiary.

While a death benefit is usually tax-free, there might be tax implications should the benefit be paid to a non-tax dependent, like your adult child.

In the event of income protection or a TPD insurance inside super claim, you will:

  • First, satisfy the insurer's definition of a claimable event.
  • The insurer will then pay the trustee of your policy.
  • You will need to meet the super fund’s definition of release. For TPD it’s “permanent incapacity” as defined in the Superannuation Industry (Supervision) Regulations 1994 (SISR) and 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 a specialist.

How do I remove life insurance from super?

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

Before you decide whether to purchase, increase or decrease your superannuation life insurance make sure you know how much cover you need to protect you and your family from financial harm.

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