Below is a summary only of life insurance through superannuation. This information is general in nature and does not take into account any individual’s financial situation, objective or needs. Further information about the general nature of this article appears in the disclaimer at the end of this article.
Introduction to life insurance through superannuation in Australia
Most superannuation (super) funds offer life insurance through your account, including life cover (also known as death cover), total and permanent disability (TPD) insurance and income protection. To be eligible for default cover, you’ll need to:
- be at least 25 years old, or
- have at least $6,000 in your super account.
It is important to note that, if you don’t have enough money in your super account, or you change super funds, you can lose your insurance cover held in that fund. Super funds are required by law to cancel your insurance if your account becomes ‘inactive’, which means it hasn’t received contributions for at least 16 months.
When you become eligible, you may automatically receive a default level of life, income protection or TPD cover. To be sure though, you should check this with your fund. While the amount you receive is usually a default level, you may be able to apply to make changes like increasing, decreasing, or cancelling parts or all of the cover. Usually this requires you to answer health and medical questions.
Insurance in super is an alternative way of holding your life insurance, with your premiums automatically deducted from your super balance. There are both benefits and limitations to being insured through your super. Understanding the pros and cons can help you decide the best way to protect yourself and your family.
Pros of life insurance through superannuation in Australia
Insurance through super has some benefits that can make it an attractive offer for many.
- Your premium payments are automatically deducted from your super account. It’s important to keep in mind that this payment arrangement will decrease your retirement savings, and if you’re not making contributions to your super account, premium deductions can erode your balance over time. You’ll also need to ensure there’s enough money in your super to cover premium payments; otherwise, your insurance may be cancelled.
- Paying for your insurance through your super is treated differently for tax purposes. Super contributions from your employer and salary sacrifice contributions are taxed at 15%, which is less than the marginal tax rate for most people. This means the money that pays for your insurance premiums may be taxed at a lower rate. Note though, tax can be higher when it comes to claim time for life and TPD policies — for policies held in super, only payouts made to ‘dependants’ (as defined by superannuation and tax law) are exempt from tax.1 Payouts to non-dependants can be taxed up to 30%2.
- Super funds often buy policies from insurance companies in bulk, meaning they may be able to negotiate cheaper premiums for super members. However, these policies are designed to suit a wide group of people and aren’t tailored to your specific needs.
- You can usually get a default level of cover through super without completing health questionnaires or examinations. You should always check the product disclosure statement (PDS) to see how your job, or any pre-existing conditions are treated at claim time.
Cons of life insurance through superannuation in Australia
There are limitations to insurance through super accounts that should also be considered when looking for a policy that suits your needs.
- Default insurance is designed to suit a large group of people — it’s not tailored to your specific needs. This can leave some people underinsured. You can apply for extra cover or changes to your insurance with some super funds, however, you may not be able to get the level of cover available to you outside of super. There are also features available in standalone policies that you usually can’t access through super, like children’s cover and funeral cover.
- You can’t get critical illness (also known as ‘trauma’) insurance through super. A trauma policy can pay you a lump sum if you’re diagnosed with a critical illness or injury (defined by the policy) that requires extensive medical treatment and has the severity set out in the insurance policy. For example, depending on the policy, you may be covered for a stroke or heart attack, among other conditions. If you want this kind of insurance, you’ll need to buy a policy outside of super.
- If you don’t have enough money in your super account, or you change super funds, you can lose your insurance cover. Super funds are required by law to cancel your insurance if your account becomes ‘inactive’, which means it hasn’t received contributions for at least 16 months. You can write to your super fund and instruct them to keep your insurance even if your account becomes inactive, but you’ll still need to make sure there’s enough money to cover your premiums.
- Your premiums are deducted from your super balance, which reduces the amount invested to grow your balance, and can reduce your final retirement savings amount. This is something to consider when selecting an insurance policy. Keep in mind that many policies outside of super provide the option to structure your premium payments so that some can be deducted from your super balance too, giving you more cashflow flexibility and control over the impact on your retirement savings, although any premium payments from super will reduce your retirement income.
- Where lump sum benefit payments would be tax free for a standalone policy, they may be subject to up to 30%2 tax for a superannuation-held policy. For example, under superannuation law, only ‘dependants’ will be exempt from any tax on an insurance payout.1
- If you have insurance through super, your super fund is the policy owner — not you. This means they can make changes to your policy terms, unlike a policy held outside of super. Another difference is that superannuation policies don’t have guaranteed renewable terms like standalone policies, so the terms you had when your policy started are not guaranteed to stay the same.
Alternatives to life insurance through superannuation in Australia
There are three ways to take out life insurance through superannuation: directly through the insurer, a financial adviser, or a comparator like Lifebroker. These alternatives offer options with your level of cover and available features.
Directly through an insurer. You can usually generate a quote and apply directly with an insurer online.
Through a financial adviser. Financial advisers can assess which type of insurance may be suitable and what level of cover will best suit your needs. They’ll also help submit and track your application — including the underwriting process — and may assist in claims applications you may make later.
Through a comparator. A comparator website, like Lifebroker, allows you to easily compare products between different insurance providers. A comparator like Lifebroker, helps you submit and track your application, however they are unable to provide you with personal financial advice tailored to your needs. A comparator can help to compare products side-by-side so you can decide which policy offers the features and prices that may suit your needs. If you’d like to find insurance through Lifebroker, you can start by using our comparison tool to find a product that suits your needs, and then apply with the assistance of one of our consultants.
The application process differs here too — you may need to go through underwriting, meaning the insurer may request a completed health questionnaire, medical reports and examination results. Providing this detail allows the insurer to shape your policy to suit your needs.
How to compare and choose the right life insurance cover for you
Comparing insurance products online can help you choose which insurer to go with, what products they offer, and how you’d like to purchase it. We provide comprehensive comparisons between some of Australia’s leading life insurers, so you can make a confident and informed decision. You can use our comparison tool to find policies that suit your needs, or our consultants can talk you through your options and help you gain clarity on whether insurance through super is enough for your circumstances.
You can contact us by calling 13 54 33.
1 Under superannuation law, a dependant includes: a spouse or de facto; a child under 18 years of age; someone who is financially dependent; or someone with whom the account holder had an interdependency relationship with.
2 Plus the applicable Medicare Levy
LIFEBROKER ONLY PROVIDES GENERAL ADVICE, WHICH MEANS WE HAVEN’T CONSIDERED YOUR INDIVIDUAL FINANCIAL SITUATION, OBJECTIVES OR NEEDS. BEFORE ACTING ON IT, PLEASE CONSIDER THE APPROPRIATENESS OF THE ADVICE, HAVING REGARD TO THESE FACTORS. BEFORE MAKING A DECISION TO PURCHASE OR CONTINUE TO HOLD A LIFE INSURANCE PRODUCT, YOU SHOULD READ THE RELEVANT PRODUCT DISCLOSURE STATEMENT (PDS). THE PDS INCLUDES THE DETAILS OF THE PRODUCT ISSUER. THE TARGET MARKET DETERMINATION FOR EACH PRODUCT IS ALSO AVAILABLE
INFORMATION PROVIDED IN RESPECT OF TAXATION LAW IS GIVEN IN GOOD FAITH AND FOR THE GENERAL INFORMATION PURPOSES OF AUSTRALIAN TAX RESIDENTS ONLY. IT IS BELIEVED TO BE ACCURATE AS AT 11 July 2023 BUT MAY BE SUBJECT TO CHANGE. LIFEBROKER IS NOT LIABLE FOR ANY LOSSES THAT MAY ARISE FROM RELIANCE ON THIS INFORMATION. LIFEBROKER DOES NOT GIVE, AND DOES NOT PURPORT TO GIVE, ANY TAX ADVICE. AS THE APPLICATION OF TAX LAW DEPENDS ON EACH PERSON’S INDIVIDUAL CIRCUMSTANCES, YOU SHOULD ALWAYS SEEK ADVICE FROM A QUALIFIED TAX PROFESSIONAL.
THIS DOCUMENT IS ISSUED BY Lifebroker Pty Ltd, ACN 115 153 243, AFSL 400209.
Frequently Asked Questions
You can usually get most types of life insurance through super, including life cover (also known as death cover), total and permanent disability cover, and income protection insurance. However, critical illness cover is not available through superannuation. You can check your super fund’s product disclosure statement to see what insurance they offer.
To automatically receive insurance through super, you need to:
- be at least 25 years old, or
- have at least $6,000 in your super account.
Once eligible, your default cover should start, and premiums will be deducted from your super balance. You’ll usually receive life cover, TPD, and depending on the super fund, income protection. Once you have cover, your super account will need to remain ‘active’, meaning it receives at least one contribution every 16 months. If not, under superannuation laws, your fund will have to cancel any insurance you have. This law is in place to protect your super balance from being eroded by premiums. However, you may contact your super fund to inform them if you do want your policy to continue notwithstanding your account is inactive or under 25.
If you join a super fund and you don’t meet either of the insurance eligibility conditions, you won’t receive default cover through super until you do. If you’d like insurance through your super before meeting these conditions, you can usually ‘opt in’ for cover. You’ll need to contact your super fund to arrange this.
You should be able to see your insurance details on your annual statement, or through your online portal (if you super fund has that facility). You can also call your super fund and ask them whether you’re covered.
Whether you have insurance inside or outside of super, the level of cover you need will depend on your personal circumstances. You can use our calculator to help you decide how much cover you may like.
Yes, you can cancel your insurance in super. If you do, you generally won’t receive any refunds for premiums already paid. And if you decide you want cover in super later on, you will usually have to apply and go through underwriting.
Yes, you can have standalone insurance policies at the same time as policies inside super. Some people may choose to do this to ‘top up’ their life insurance in super, meaning that they’re effectively covered for a higher amount but have structured insurance so that part is held in super and the rest outside. This is also a way to gain access to policy features that may not be available under super, like child cover or funeral cover.
In saying that, it’s important to note there are restrictions on the maximum amount you can claim on income protection. You can generally only claim up to 70% of your regular monthly income across any and all income protection policies. There are also waiting period which apply and no insurance is paid for the time you are off work during the waiting period. Having more than one income protection policy will not increase your potential claim amount.