Insurance Inside Super: How Much Is It Costing You?

01 What you probably already have

If you have a super fund, you likely hold insurance inside it without having actively chosen it. Funds commonly provide default life insurance (a lump sum to your beneficiaries if you die) and TPD cover (a lump sum if you're permanently unable to work), and some include income protection (a portion of your income if you're temporarily unable to work). It's offered on a group basis, often without medical checks, which makes it accessible — but the premiums are deducted from your super balance, not your bank account.

Default cover inside super is widely assumed to be adequate because it is automatic, and the assumption fails in both directions. The sum insured is set by the fund rather than by your circumstances, so it is commonly far too little for someone with a mortgage and children and entirely unnecessary for someone with neither — while the premiums come quietly out of the balance in both cases.

Source: ASIC Moneysmart — Insurance through super

02 The trade-off: premiums erode retirement

Because premiums come out of your balance, every dollar of cover is a dollar not invested for retirement — and the lost compounding makes the long-run cost larger than the premiums alone. The calculator shows the effect: a modest annual premium, over 25 years, with the growth it would have earned, can cost tens of thousands of final balance. That's not a reason to drop cover you need — the payout can dwarf the cost if you claim — but it is a reason to make sure you're not paying for cover you don't.

On the defaults above, the worked example shows: Premiums of $30,000 over 25 years cost about $75,258 of retirement balance once lost growth is counted — the price of the cover, worth it only if you need it.

Source: ASIC Moneysmart — Insurance through super

03 How much cover do you actually need

The right amount of cover depends on who relies on your income and what debts you would leave behind, and the answer varies enormously between people who look similar on paper.

Someone with a mortgage and young children typically needs substantial life and TPD cover — enough to clear the debt and replace income until the children are independent. A single person with no dependants and no debt may need very little life cover at all, because there is no one for the payout to protect, though income protection and TPD still matter because they protect the person themselves.

A rough starting method: add the mortgage and other debts, add the cost of raising and educating any children to independence, add a few years of your income for the household to adjust, then subtract existing savings and any cover held elsewhere. The result is a target, not an answer, but it is far better than the default sum the fund happened to assign you.

Income protection deserves separate thought because it covers the most likely event. Death and permanent disability are rarer than a period of illness or injury that stops you working for six months, and income protection is the only one of the three that covers that.

Source: ASIC Moneysmart — How much life insurance do I need?

04 Inside super vs outside, and tax

Holding cover inside super is convenient and cash-flow friendly — the premiums come from the balance rather than your take-home pay — and funds can often negotiate group rates that are cheaper than individual policies for the same sum insured.

The downsides are real. The premiums erode the balance and the growth it would have earned, which is the whole subject of this post. And the cover available inside super is frequently narrower than what you can buy outside it.

The clearest example is the TPD definition. Inside super, TPD generally must be assessed against an "any occupation" test — permanently unable to work in any job you are reasonably suited to by education, training or experience. Outside super you can buy "own occupation" cover, which pays if you can no longer do your job. For a surgeon who loses fine motor control, that difference is the difference between a claim and no claim.

Tax works differently too. Premiums for life and TPD inside super are generally deductible to the fund, which effectively reduces their cost by 15%. But a TPD benefit paid from super to someone under 60 can be taxed, and a death benefit paid to a non-dependant is taxed on its taxable component — so a payout inside super may be worth less in the hand than the same sum assured outside it.

The common structure that works is a mix: baseline life and TPD inside super for the cost efficiency, and own-occupation or income protection cover held outside where the definition matters more than the premium. The balance erosion itself is the same effect described in Super Fees — a small annual percentage, compounded against a growing balance.

Source: ASIC Moneysmart — Insurance through super

05 Review triggers and the inactive-account trap

Two things to watch, and both cost money silently.

Multiple super accounts mean multiple sets of premiums for overlapping cover. Someone with three old accounts may be paying three lots of default life and TPD insurance while only ever being able to claim meaningfully on one — consolidating stops that, but only after you have checked which cover you actually want to keep, because closing an account cancels its policy and it may not be replaceable on the same terms.

Second, under the Protecting Your Super rules, insurance is cancelled on accounts that have been inactive for 16 months, and is not provided by default to members under 25 or with balances under $6,000 unless they opt in. That is intended to stop balances being eroded by cover people do not need, and it works — but it also means someone relying on an old account's cover may not have it any more, and will discover that at the point of claim.

Review the cover whenever something changes what it is for: a mortgage taken or paid off, a child born, a partner's income changing, a diagnosis. Those are the moments when the default amount is most likely to be wrong in one direction or the other.

Source: ASIC Moneysmart — Insurance through super