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Last Updated on 24 October 2018

Life Insurance Through Super: Get The Facts


Life insurance through super is an appealing prospect for many Australians, who like the idea of paying a life insurance premium using pre-tax dollars. However, there is more to life insurance through super than meets the eye. It’s important to understand the pros and cons of life insurance both in and out of super before making a decision.

 

Key Points
  • Life insurance through super allows you to pay for life insurance premiums using pre-tax dollars that are deducted from your superannuation balance.
  • Life insurance through super may have cheaper premiums, but benefit levels tend to be lower and there is reduced choice of policies when compared to life insurance outside of super.
  • You must make a valid binding nomination to have the final say over who will receive your life insurance payout; otherwise the decision lies with the trustee of the super fund.

Life Insurance Through Super

If you are a member of your employer’s default superannuation fund, you probably have life insurance—even if you don’t realise it. These funds are required by law to offer a minimum level of life insurance, which means that unless you’ve cancelled the insurance, you’re paying for it.

Many Australians are surprised to learn that they’re paying life insurance premiums through their super because they don’t see the payment coming out of their bank account. Instead, premiums are deducted from their super balance.

Types of Life Insurance Through Super

Normally there are three types of life insurance available through a superannuation fund.

  • Life Cover: Lump sum payable on your death.
  • Total and Permanent Disability (TPD) Cover: Lump sum paid out if you are unable to work again in any occupation due to total and permanent disablement.
  • Income Protection Cover: Percentage of your income paid out for a set period of time if you are temporarily unable to work due to an injury or illness.

Trauma insurance and ‘own occupation’ TPD insurance is not available through superannuation.

To learn more about the options available through your fund, download or request its Product Disclosure Statement (PDS). This will give you details on who the insurance underwriter is and information about the available life insurance policies.

TPD OCCUPATION DEFINITIONS

PROS

  • Pre-tax premiums: Pay your premiums using pre-tax money that is sitting in your super balance.
  • Free up cash: Super premiums aren’t paid from your day-to-day cashflow, so you don’t have to set aside money to pay the premium.
  • Premiums may be cheaper: Funds purchase policies in bulk and can sometimes get group discounts, which lowers the cost of your premium.
  • Flexibility to adjust your cover amount: You can increase, decrease, or cancel your life insurance through super.
  • Avoid medical examinations: Life insurance through super is usually granted automatically to members of the fund.
  • Convenient to manage: No need to remember to pay the bills as it happens behind the scenes on your behalf.

CONS

  • Benefit payout may be taxed: If the lump-sum is going to a someone who is not a dependant, such as an adult child, some funds will tax the payout.
  • Limited features for some policies: You cannot access the full range of policy types and benefits; extras such as a financial planning benefit and child cover may not be available through super.
  • Reduce your superannuation balance: Your retirement fund gets smaller as your life insurance premiums are paid.
  • Restricted portability: Your cover may be affected if you switch funds or if your employer’s contributions stop coming in.
  • Slower payouts: Benefits are paid first to your super fund, then released to your beneficiary.
  • Super trustee is in charge: If you haven’t made a valid binding beneficiary nomination, the super fund trustee decides who gets the benefit.
  • Expiration age: Cover may end at a certain age (around 65 or 70).
  • Risk of underinsurance: The maximum benefit for life insurance through super may be lower than what you need, leaving you underinsured.

LIFE INSURANCE THROUGH SUPER

How to Get More Value From Life Insurance Through Super

Although it seems as if there are a long list of disadvantages to life insurance through superannuation, simply taking a proactive approach can help you get more value from your life cover. Here are a few steps you can take.

Consolidate your super funds

If you have multiple funds, you may have multiple life insurance policies. That means you could be paying twice the premiums. Combine your funds to reduce your payments.

Evaluate the amount of cover you need

Consider how much money your loved ones would need to cover debts and maintain their standard of living without your financial contribution. Compare this amount to the amount you’re insured for to see if it is enough.

Top up your super to compensate for premium payments

If you’re worried about a dwindling superannuation balance, consider topping up your super with additional contributions throughout the year. Be aware of any contribution caps that may apply.

Review your life insurance

It’s a good idea to review your life insurance needs at least once a year or whenever your financial situation changes. If you get married, divorced, move house, change jobs, or have a child, it could affect the amount of cover you need.

Compare policies in and outside of super

Shop around to see what policies are available outside of super and compare them to what you’ve got.

Life Insurance Outside of Super

Life insurance outside of superannuation tends to be less restricted, though it may cost slightly more and you’ll have to pay a regular premium from your net income.

Types of Life Insurance Outside of Super

There are four main types of life insurance available outside of super:

  • Life Cover: Lump sum payable on your death
  • Total and Permanent Disability (TPD) Cover: Lump sum paid out if you are unable to work again in any occupation due to a total and permanent disablement. Own occupation definition available.
  • Income Protection Cover: Percentage of your income paid out for a set period of time if you are temporarily unable to work due to an injury or illness.
  • Trauma Cover: Also called Critical Illness Cover, this pays a lump sum to cover short-term expenses if you are diagnosed with certain illnesses or sustain certain injuries.

Life insurance outside of super often comes with additional benefits, such as premium-free child cover, a bonus financial advisor benefit, or an advance payment for funeral expenses. Cover may also have a higher policy expiry age, with some policies remaining valid until your 100th birthday.

Pros and Cons of Life Insurance Outside of Super

The pros and cons of life insurance outside of superannuation are very different to those of life insurance inside superannuation.

PROS

  • Wider variety of options: More cover types and features available.
  • Older policy expiry age: Cover may remain valid up to age 100.
  • Tax-free benefit: Claims are generally not taxed when paid out, regardless of the beneficiary’s status.
  • Direct benefit payouts: Benefits are paid directly to the policy owner or beneficiary.
  • Higher benefit caps: Benefit levels are typically higher outside of super.

CONS

  • Premiums must be paid out of pocket, which may restrict cash flow.
  • Application process may be more detailed than life insurance through super.
  • Policy management is not automated.

Which One is Right for Me?

To decide which method of life insurance is right for you, weigh up the pros and cons and decide what matters most to you. Is it having a broader range of choice and higher benefits or the ability to pay for life cover out of your super balance?

Life insurance through super is generally best for people with restricted cash flow who would like the peace of mind of knowing that they have some level of cover. This may be young singles, couples, or people with debts but no dependents.

Life insurance through super is generally suited to those who need a higher level of life cover than what is offered through superannuation. It may be a good fit for people who need a broader scope of life cover or who wish to leave their superannuation balance untouched. This may be parents with children under 18, or older adults with debts whose children have left the home.

If you’re unsure which type is right for you, consider Superlink (also called Flexilink), which allows you to link a policy within your super to a policy outside of super, effectively creating a compromise. You could also split your life cover across separate policies both inside and outside of super.

Choosing a Beneficiary

A beneficiary is the person, persons, or entity who will receive your life insurance payout. It’s an important decision and one that should not be taken lightly. When you nominate a beneficiary, be sure to let them know as they will probably be the one who has to make the claim.

Life insurance through super

The death benefit of life insurance through super is your super account balance plus any life insurance payment. There are two types of beneficiary nominations you can make for life insurance through super. If you fail to nominate a beneficiary, the super funds’ trustee has the final decision on who will receive the death benefit.

  • Binding nomination: Your fund’s trustee cannot change your decision. However, some binding nominations expire after a certain period of time and you must re-nominate.
  • Non-binding nomination: You can consider this a suggestion you make as to who your beneficiary should be, but the final decision lies with the fund’s trustee.

Life Insurance Outside of Super

As the policy owner, you are able to choose the beneficiary or beneficiaries of your life insurance payout. Most insurers allow you to nominate up to five beneficiaries, who can be people or entities, such as a charity or organisation.

You can also nominate a contingent beneficiary as a backup if one of your nominated beneficiaries should pass away before you do. Remember that your will cannot override your life insurance nomination.

Life Insurance Outside of Super

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