Benefits and drawbacks of getting insurance through super

Most superannuation funds generally offer three types of insurance:

• Life Insurance
  This type of policy pays a lump sum to your dependants on your passing away. It may also offer a payout if you are diagnosed with a terminal illness.
  
  
• Total and Permanent Disability (TPD) Insurance
  A TPD policy pays you a lump sum if you suffer a permanent injury or illness because of which you are no longer fit to work.
  
  
• Income Protection Insurance
  This type of cover pays you a percentage of your monthly income to cover the gap in work due to an illness or accident.  

In the past, super funds automatically provided members with life cover and TPD insurance. However, new members under the age of 25, or those with a low super balance, are now required to specifically opt-in for insurance through super – as the cover isn’t automatically provided anymore. Existing members with low super balance may also need to contact their super fund to continue with their insurance policy through super.

Life insurance is essential to protect yourself and your dependants financially through various eventualities. However, comprehensive insurance coverage could cost thousands of dollars, making it unaffordable for many. On the other hand, getting the default life insurance cover offered by various super funds is usually cheaper, making it the go-to option for many Australians.

Superannuation funds buy policies in bulk, which gets them discounts from insurance providers. This discount is passed on to the members of the fund in the form of reduced insurance premiums. Additionally, default insurance through super isn’t limited to life insurance but usually includes TPD and income protection insurance, too. This kind of consolidated cover at a cheaper price than what you’ll potentially get outside (when you buy directly from an insurer) can make it look like a good deal to buy insurance through super. 

However, with most insurance products, you generally get what you pay for. Therefore, a lower premium could translate into a lower life cover, which may not be adequate to meet your requirements in case of an untoward event. Therefore, it’s  worth checking the size of your insurance cover through super to be sure it matches your requirements. 

Besides a lower premium, you may save some money on taxes when you  get a life cover through your super account.

When you take insurance through super, you pay for it with your pre-tax dollars. It’s generally possible to set up a salary sacrifice arrangement with your employer to make extra contributions to your super to cover the cost of your insurance. Such contributions (up to a capped amount) are taxed at a maximum rate of 15%, which is lower than most people’s marginal tax rate. You should remember that you cannot withdraw the money you salary sacrificed to your super fund until you reach the preservation age and meet a condition of release. 

It could help to discuss a salary sacrifice arrangement with a qualified financial professional before setting up one.

Another reason why some people may prefer to take the default insurance cover within their super fund is automatic acceptance. If you have any existing medical condition, it’s usually challenging (or more expensive) to get insurance from an independent insurer. However, when you take insurance through super, you don’t have to go for a medical or reveal pre-existing conditions, making it a convenient option for many.

Life insurance, though considered necessary, often comes at an additional cost to you. But holding your life cover through your super doesn’t impact your everyday budget, as the premium is deducted from your super balance. While you may find this to be an advantage in the short term (as you don’t have to plan for another expense), it’s worth considering the effect of built-in life insurance premiums on your retirement nest egg. 

Unfortunately, by using your super contributions to pay for your insurance premium, you’ll erode your future savings and earn less interest on your super balance, which may impact the quality of your life in your golden years. You may consider topping up your super through personal super contributions or a salary sacrifice arrangement to prevent this from happening. 

Another potential issue with purchasing life insurance through super is the size of the cover. Insurance offered by super funds is mostly generic, and you may not be able to customise the type or level of your cover. For instance, the life benefit in your policy may be a couple of million dollars, but your family might require much more in the case of an eventuality. Purchasing insurance independently gives you the option of customising your cover according to your requirements in different stages of life. 

The term of your insurance cover in super is usually limited, too. Life cover through super generally ends at 70, but if you buy insurance outside of super, you can continue the cover as long as you can pay the premiums. 

If you are considering buying insurance through your super, it’s also worth checking whether or not you can nominate the beneficiary for your super. If you are allowed to make a binding death benefit nomination, it could make it easier for your dependents to receive the benefits under the policy. In the absence of such a form, the fund manager may use their discretion to decide which dependant (or dependents) should receive the death benefit.

Overall, it’s worth checking the details of the default cover provided by your super fund and comparing it with independent insurance policies to make an informed choice. If you are not sure which type of insurance is best suited to you, speaking to a qualified financial advisor could help.