Insurance inside super – what you should know

Taking out insurance through your super fund may be a cost effective way to get protection but the cover you have might not always be enough.

More than 70% of Australian life insurance policies are currently held inside super.1

If it’s something you’ve been thinking about, there are a number of things to consider, including whether you have the right type of cover and enough of it.

Let’s start with some of the basics:

What types of insurance are available?

Super funds generally offer three types of cover

  • Life insurance which pays a lump sum on your death or the diagnosis of a terminal illness
  • Total and permanent disability (TPD) which pays a lump sum if you become disabled and are unable to work again
  • Income protection which provides a replacement income of up to 75% of your regular income if you can’t work due to illness or injury.

What do the statistics show us?

Super funds are critical to providing life insurance cover for many Australians, however almost 95% of the population remains underinsured.

Figures released by Rice Warner earlier this year show:3

  • More than 13.5 million separate policies are held through super funds in Australia 
  • Each year about 17,000 disability and 46,000 death benefits are paid through super
  • The median level of life cover through super meets about 60% of the average household’s basic needs, and just 38% of the amount required to ensure the same standard of living can be upheld after the death of a parent or partner
  • Median cover meets only 13% of TPD needs and 17% of income protection needs.

What are the upsides of insurance through super?

  • It's often cheaper because super funds purchase insurance policies in bulk
  • If you have an employer-sponsored plan, you may be able to negotiate further discounts
  • If premiums are deducted from your super, you won’t be dipping into your take-home pay 
  • There may also be tax benefits because you pay for cover out of your pre-tax super contributions
  • Your cover will often be automatically accepted, so there’s no need for medical examinations
  • If premiums are automatically deducted, your insurance may be easier to manage

What are the downsides of insurance through super?

  • The types of insurance and level of cover may be limited
  • Paying insurance premiums via your super could decrease your super balance if your super is not being offset by contributions
  • If you have more than one super fund, you may be doubling up on insurance costs
  • All claimants and beneficiaries for life insurance claims need to be considered by the trustee, so you’ll need make sure your binding nominations are up to date
  • Payments may be delayed, as money is normally paid by the insurer to the super fund first
  • Tax may be payable on some benefits
  • Cover through super often ends when you reach a certain age (usually 65 or 70).

What else should I think about?

After considering the pros and cons of holding insurance inside super, you’ll need to determine the level of cover you need and remember to review your cover regularly, especially when your circumstances change.

Our insurance calculator can help you work out how much may be right for you, and if you’d like some help, you can call us on 131 267 or use our find an adviser tool.

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© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.