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🇦🇺 Australia 7 min read

Insurance Inside Super: What You Need to Know

Most Australians have insurance inside their super fund without even realising it. While it provides valuable protection, the premiums quietly erode your retirement balance over decades. Here's how to make sure you're getting value for money.

Types of Insurance in Super

Australian super funds typically offer three types of insurance cover to their members. Many funds automatically provide default cover when you join, particularly if you're employed and receiving SG contributions. Understanding what each type covers is the first step to assessing whether your current arrangements are appropriate.

Life Insurance (Death Cover)

Life insurance pays a lump sum to your nominated beneficiaries if you die. Inside super, this is often called "death cover." The benefit can be paid to your dependants (spouse, children, financial dependants) or to your estate. The amount of default cover varies widely between funds, but typically ranges from $100,000 to $400,000 for a working-age adult.

Total and Permanent Disability (TPD)

TPD insurance pays a lump sum if you become totally and permanently disabled and are unlikely to ever work again. The definition of "disability" varies between policies -- some use an "own occupation" definition (you can't work in your usual job), while others use an "any occupation" definition (you can't work in any job you're suited to by education, training, or experience). Inside super, most policies default to the "any occupation" definition, which is harder to claim against.

Income Protection

Income protection insurance replaces a portion of your income (typically 75%) if you're unable to work due to illness or injury. Benefits are usually paid monthly for a specified period (commonly 2 years inside super, though some policies offer up to age 65). Not all super funds include income protection in their default cover.

Default Cover vs Voluntary Cover

Default cover is automatically provided when you join most large super funds. You don't need to apply or answer health questions, but the cover amount may not match your needs.

Voluntary cover allows you to increase your insurance beyond the default amount. You'll typically need to provide health information and may need to undergo medical assessments. Premiums will be higher but the cover can be tailored to your needs.

The Cost to Your Retirement

Insurance premiums inside super are deducted directly from your super balance. While this means you're not paying out of pocket, it does reduce the amount invested for your retirement. Over a 30-year working career, the impact can be substantial.

Premiums increase as you age. What starts as a few dollars per week in your 20s can grow to hundreds of dollars per month in your 50s. Since the premiums come out of your super balance, they also reduce the investment returns you would have earned on that money -- a compounding effect that magnifies the true cost over time.

Example: The Hidden Cost Over 30 Years

David joins his super fund at age 25 with default life and TPD cover. His premiums start at $5 per week ($260/year) and increase gradually to $25 per week ($1,300/year) by age 55.

Over 30 years, David pays approximately $18,000 in total premiums. But the real cost is higher: those premiums would have earned investment returns if they'd stayed invested. At 7% per annum, the opportunity cost brings the total impact to approximately $35,000-$40,000 in lost retirement savings.

If David also has income protection, the total cost could be double or more.

This doesn't mean insurance in super is a bad deal. For many people, it's the most cost-effective way to access insurance because premiums are paid from pre-tax money (effectively getting a tax benefit) and group rates inside large super funds can be cheaper than retail policies. But it does mean you should regularly review whether the cover you're paying for is actually what you need.

Inactive Accounts and the Protecting Your Super Rules

Since 2019, the "Protecting Your Super" legislation has introduced rules that affect insurance inside super accounts that become inactive. These changes were designed to prevent people from unknowingly having their super balances eroded by insurance premiums on accounts they've forgotten about.

If your super account hasn't received a contribution or rollover for 16 consecutive months, your fund must cancel your insurance cover unless you've elected in writing to maintain it. This is particularly relevant if you have multiple super accounts from different employers.

Action required: If you want to keep insurance on an inactive account, you must contact your super fund and opt in to maintain cover. Otherwise, your insurance will be automatically cancelled. This is one reason why consolidating super accounts is often recommended.

Additionally, super funds cannot charge insurance premiums that would reduce your balance below zero. If your balance is too low to cover premiums, your insurance may be cancelled.

When to Review or Change Your Cover

Your insurance needs change throughout your life. The default cover that was appropriate in your 20s may be completely wrong in your 40s, and vice versa. Regular reviews ensure you're neither underinsured nor overpaying for cover you don't need.

Life Events That Should Trigger a Review

Should You Opt Out?

Opting out of insurance entirely is appropriate in some circumstances. If you have no dependants, no debts, and sufficient savings to cover a period of disability, the premiums may not be worthwhile. Young single people without financial responsibilities often fall into this category.

However, consider that if you opt out now and later develop a health condition, you may not be able to get insurance at all, or it may come with significant exclusions and higher premiums. The default cover inside super often doesn't require medical underwriting, making it a form of guaranteed coverage that can be valuable to maintain.

Tax Treatment of Insurance in Super

There are tax advantages to holding insurance inside super, which is one reason many financial advisers recommend it. Understanding the tax treatment helps you compare the true cost of insurance inside versus outside super.

Premiums for life and TPD insurance inside super are tax-deductible to the super fund, effectively reducing the fund's taxable income. This benefit is passed on to members through lower premiums compared to equivalent retail policies held outside super. Income protection premiums inside super are also deductible to the fund.

Tax on Insurance Payouts

Life insurance benefits paid to tax dependants (spouse, children under 18, financial dependants) are tax-free.

Benefits paid to non-dependants (adult children who are not financially dependent) may be subject to tax on the taxable component, at rates up to 32% (including Medicare Levy).

TPD benefits received after age 60 are generally tax-free. Before age 60, a portion may be taxable.

How Talk Through Wealth Helps

Insurance inside super involves a trade-off between protection today and retirement savings tomorrow. Talk Through Wealth helps you quantify this trade-off and make informed decisions.

Understand the True Cost of Insurance in Your Super

Model how insurance premiums affect your retirement balance over time.

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Disclaimer: This article is for educational purposes only and is general in nature. Insurance inside super is governed by your fund's specific policy terms. Default cover, premiums, and definitions vary between funds. Consider seeking advice from a licensed financial adviser before making changes to your insurance arrangements.