Advantages and disadvantages of insurance in super

08 August, 2019

Find out what to consider when selecting your life insurance cover.

Holding insurance in your super fund differs in some ways to holding insurance outside of your super. Here are some of the advantages and disadvantages of holding insurance in super.


Premiums can be tax-effective in super

If you make or your employer makes pre-tax contributions to your super fund and your fund deducts a premium for life and total and permanent disability (TPD) insurance from your super account, the premium is effectively paid from your pre-tax income. Pre-tax contributions include compulsory super guarantee and salary sacrifice contributions made by your employer and personal contributions made by you. These are taxed at just 15% within the fund which could result in a significant cost saving compared to paying for premiums outside of super, with your after-tax income.

No medical underwriting

Most super funds offer a basic level of life and TPD cover without needing you to complete a medical questionnaire to assess the risk of insuring you (known as ‘medical underwriting’). This makes it easy to obtain a basic level of life and TPD cover and can be beneficial if you have pre-existing health issues. However if you want to increase the level of cover, you will need to undergo medical underwriting.

Group premiums

Super funds offered to the public usually have a large number of members and can negotiate group discounts for members. The premiums for insurance in super may be cheaper than the premiums for equivalent insurance outside of super members’ premiums.

Limited cash flow

Insurance premiums deducted from your super account won’t affect your cash flow. This can be useful if your cash flow is limited.


Restrictions on type and terms of insurance in super

Only life, TPD and income protection insurance is available in super. You cannot have trauma insurance in super, which covers you if you suffer a critical illness. TPD insurance in super is generally only payable if you become unlikely to work in ‘any’ occupation for which you are reasonably qualified. Outside of super, you may be able to get TPD insurance which covers you, if you are unlikely to work in your ‘own’ occupation. This might be more appropriate for you depending on your personal circumstances. If you choose income protection in super, the cover is basic compared to cover you might be able to get outside of super.

Taxation of proceeds

TPD and life insurance proceeds received from your super fund may be taxed depending on your or your beneficiary’s circumstances. If you own life insurance or TPD insurance outside of super, the proceeds are generally not taxed.

Premiums reduce your retirement savings

Insurance premiums deducted from your super account reduce your super balance which reduces your retirement savings.

Insurance may be cancelled

If you have insurance in super, you need to ensure that you or your employer continue to make contributions to your super fund. Your insurance will be automatically cancelled if you haven’t contributed in 16 months or haven’t advised the fund you want to opt-in to retain the cover.

Trustee owns the policy

The trustee of the super fund owns the policy and may make changes to the policy including changes to definitions and payment terms. Holding insurance outside of super means that, provided the premiums are paid, the terms of the policy don’t change.

To check if you have insurance in super, contact us or your super fund. If you would like to review the type or level of insurance you have, contact us and we can help.