Pros and Cons of Life Insurance In Super

Billy Explores Summary 

Most Aussies know these days that you can get life insurance cover through your superannuation. Why is this different from a stand alone life insurance policy and what are the pros and cons of having life insurance cover in super?

Pros of Life Insurance In Super

  • Life insurance in your super might be cheaper than standalone life insurance cover
  • You might be able to compare life insurance cover offered within your super
  • There might be tax benefits with life insurance in super
  • You might not have to do a medical to buy life insurance
  • Super policies often include TPD and income protection as part of the life insurance policy
  • It can be easier to get life insurance in your super
  • You might be able to increase your life insurance cover

Cons of Life Insurance in Super

  • Sometimes you can’t properly compare life cover within super
  • The amount of life insurance coverage might not be enough for your needs
  • It reduces your final super balance
  • Trauma insurance is not normally available through super funds
  • You may not be able to guarantee who the beneficiary will be

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Pros and Cons of Life Insurance in Super

Most people know these days that you can get life insurance cover through your superannuation. Why is this different from a stand alone life insurance policy?

More than 70% of Australians who have life insurance in Australia in 2022 have it through their super fund. This means that a lot of people have life insurance through their super fund (often along with total and permanent disability insurance and income protection insurance).

Life insurance in super is usually only small amounts, and may not be the best life insurance policy for your needs. You can choose to increase it. In its Underinsurance in Australia 2020 report, financial research firm Rice Warner says that the median default life insurance cover in super meets “approximately 65 to 70 percent” of the basic cover needs of average households, but “a much lower proportion” for parents with dependent children.

A definite pro is that a life insurance policy that is part of a super fund tends to have lower premiums than one that is bought separately, but it may not cover as much and be the best life insurance policy for your needs.

Now might be a great time to think about whether a life insurance policy in your super fund is actually the best life insurance cover for your needs, whether you’re comparing super funds or looking at your life insurance options. Here are some of the pros and cons that might help you out to make that decision.

Pros of Life Insurance In Super

Obviously if you have life insurance in your super you won’t have the opportunity to compare life insurance policies in Australia from other providers. However, there are many pros of having life insurance in Australia, and it could very well be the best life insurance policy for your needs! 

Life insurance In Your Super Might Be Cheaper Than Buying Life Insurance Outside 

Due to the number of people who belong to them, super funds can usually get group discounts on the life insurance premiums they charge their members.

This doesn’t mean that it’s always cheaper than getting the same insurance coverage on your own, but it does mean that the insurance premiums may be very low compared to what you could get on your own.

It might be a good idea to compare life insurance policies in Australia, both and compare the cost of life cover that you buy directly with the cost of life insurance that your super fund offers.

Compare Life Insurance Policies Within Your Super

You might be able to have the opportunity to compare life insurance policies and terms within your super fund and get the best life insurance policy for your needs. After all, we are comparing the best life insurance in Australia in 2022!

There Might Be Tax Benefits With Life Insurance In Super

Depending on your employer, you may have a few ways to pay for these premiums by putting money from your salary into your retirement account. Actually, one of the questions we regularly get asked is “Do You Know If The ATO Says Is Life Insurance Tax Deductible?”

The Australian Taxation Office (ATO) says that you and your employer can agree to “sacrifice” some of your salary or wages by putting a certain amount straight into your super fund instead of giving it to you. The ATO says that this will be treated as an employer super contribution and taxed at a maximum rate of 15%, which is lower than the marginal tax rate for most people.

This is also true for people who are self-employed because they can get a direct tax deduction on their life insurance if they pay for it with pre-tax income (called “concessional contributions”).

Note, though, that money you put into your superannuation through salary sacrifice can’t be taken out again until you meet certain conditions. This means that you are locking away your money. Before making a choice, you might want to talk to a qualified professional, like a financial adviser, about salary sacrificing.

You Might Not Have To Do A Medical To Buy Life Insurance

This is another benefit. If you have the default level of life insurance coverage that your super fund offers, some funds may accept you without a health check.

Note, though, that if you want more coverage than the standard level through your super fund, you might have to fill out a medical questionnaire and get a medical exam. It definitely is worthwhile to look carefully at your insurance’s Product Disclosure Statement (PDS) to see if you’ll be covered for any health problems you already have.

Super Policies Often Include Both TPD and Income Protection Insurance

Along with life insurance, some super funds also offer TPD insurance and income protection insurance. Income protection insurance in super is often also called salary continuation insurance.

Getting these policies and your life insurance through your super fund may be cheaper than getting insurance elsewhere, since super funds can buy policies in bulk.

It Can Be Easier To Get Life Insurance In Your Super

When you get life insurance through your superannuation, the premiums are taken out of your superannuation balance instead of your own bank account.

It will cost you either way, but if you have other financial obligations like a home loan or a family to raise, having the premiums taken out of your super account may make it easier on your immediate cash flow, even though it will still come out of your retirement nest egg.

It’s important to remember that as of April 2020, people under 25 who join a new super fund will no longer get life insurance by default, unless they work in a dangerous job. This means that if they want this insurance, they will have to ask their fund for it. Accounts with less than $6,000 in them and no contributions for at least 16 months will also lose their insurance coverage unless the account holder “opts in” to keep it.

You May Be Able To Increase And Compare Your Life Cover

Of course, sometimes you realize that it’s not the best life insurance policy for your needs, and if you aren’t happy with the amount of life insurance cover your super fund provides by default, you can usually apply to increase your cover.

However, note that you may have to answer a medical questionnaire and complete a health check before your increased cover is approved.

Cons Of Life Insurance In Super

While it’s great you have life insurance coverage in your super, and have the surety and knowledge that you’re covered should anything bad happen to you. However, there are certain cons of having life insurance in your super as well that you need to be aware of before you compare life insurance and decide whether life insurance in super is the best life insurance cover for your needs..

You Can’t Properly Compare Life Insurance Cover

Super funds traditionally have limited options for life insurance cover, which means you can’t properly compare life cover, and compare the best life insurance policies in Australia through super. This means although you might have a policy, the cover is not enough to meet your needs, as per the below.

The Amount Of Life And Income Protection Insurance Coverage May Not Be Enough For Your Needs

The standard level of life insurance coverage in super is often between $100,000 and $200,000, which is low compared to the needs of some Australians.

This means that, depending on your situation, it might not be enough for you. As a rough estimate, the Rice Warner report mentioned above said that parents with children who are 30 years old and need life insurance would need about $561,000 per parent.

You can also get a rough idea of how much money you might need by thinking about your current debts, your long-term obligations (like the cost of raising children), and the amount of money your family needs to keep living at the same level for a number of years you are comfortable with.

If the coverage from your superannuation fund isn’t enough, you might want to see if you can apply for more insurance, or you might want to think about a life insurance policy that isn’t part of your superannuation.

It’s very worthwhile to note the income protection benefits of policies that are part of your superannuation may only cover a certain percentage of your income for a short amount of time, usually between two and five years.

Again, if you find that the default amount of cover is not enough for you, you can talk to your fund to see if you can increase the cover to better meet your needs, or you can look into an income protection policy outside of superannuation. Which is where Billy Explores comes in to compare life insurance policies in Australia and get the best life insurance available in Australia in 2022 for your needs.

Some people may benefit from having insurance both inside and outside of their superannuation fund (two policies), but this will depend on your situation and you may want to talk to a financial adviser for personalised advice.

It Reduces Your Final Super Balance

If you pay premiums with money you put into your super account, your fund will have less money to invest. This could change how much money you have in your super fund by the time you retire.

People who only work occasionally or part-time and have a small amount of money coming into their account may find it hard to pay for insurance.

In 2019, the Federal Government made changes that went into effect in April 2020. They did this to stop life insurance premiums from eating away at retirement savings through fees and charges and to give people more ways to “opt out” of insurance.

One effect of these changes is that most workers under 25 will no longer get life insurance automatically when they join a new super fund. If they want this cover, they will have to “opt in” to it.

Trauma Insurance Is Not Usually Available Through Super Funds

Trauma insurance, also called trauma cover or critical illness insurance, gives you a lump sum of money to cover immediate medical costs and other financial needs if you get a serious illness or injury. Trauma insurance is a standard part of most life insurance policies that are not part of a super fund.

Super funds no longer sell new trauma insurance policies. However, if you were in a super fund that sold trauma insurance before July 2014, you might still have it in your fund. Contact your super fund to find out if you’re unsure.

You May Not Be Able To Guarantee Who The Benefactor Is

When it comes to paying out a superannuation death benefit, the trustee of the super fund usually decides how the money will be split up. You might be able to make a binding death nomination, but you might not be able to name everyone you want to.

If you need to know for sure who will get the death benefit, you may need to talk to your super fund or think about getting an outside policy. The ATO says that the way the benefit payment is made and who gets it will depend on the rules of your super fund and the laws that apply.

Questions You Need To Ask Your Superannuation Fund About Your Life Insurance Cover

It’s great that you have some life insurance cover. But it still might not be the best life insurance in Australia for your needs. If you are holding life insurance in your super, there are some important questions to ask your super fund:

The Best Life Insurance Policies In Australia For Your Needs

So, we’ve reviewed the pros and cons of having life insurance in super. The best thing to do is to compare life insurance policies in Australia outside of super and get the best life insurance policy in Australia for your needs. The best thing is it’s 2022, and through Billy Explores you can save time and effort and explore potential savings and find the best life insurance in Australia from our panel of providers! Start by clicking here.