Maximizing Insurance Inside Your Superannuation: A Comprehensive Guide
Most Australians have some form of life insurance and Total and Permanent Disability (TPD) coverage through their superannuation, as it is often automatically included. However, it is essential to regularly review whether the cover amount and policy type continue to meet your specific needs—particularly after major life events such as marriage, divorce, starting a family, or changing jobs.
If you have received a letter from the Australian Taxation Office (ATO) stating that your insurance may be cancelled due to an inactive or small super fund, contact your superannuation provider immediately.
How Does Life Insurance Through Superannuation Work?
Life insurance purchased through your superannuation operates differently from a policy bought directly outside of super. Here are some key differences:
- Premiums are paid directly from your super fund.
- Benefits and features may be limited compared to policies outside of super.
- Claims may experience delays because you must meet both the insurer’s conditions and the superannuation’s conditions of release.
Generally, superannuation funds provide default cover that includes a lump sum payout to your beneficiaries upon death or terminal illness diagnosis. Additionally, many funds include TPD insurance, which provides financial protection in the event of total and permanent disability. Some super funds also offer income protection insurance.
Beware of Losing Insurance Inside Superannuation
As of 1 July 2019, life insurance inside superannuation may be cancelled if your account balance falls below $6,000 and has been inactive (i.e., no contributions or roll-overs) for more than 16 months. In such cases, your super fund may transfer the inactive account to the ATO, which will consolidate it with your active accounts.
How to Check if You Have Insurance Inside Super
You can check your annual super statement or access your account online to review the insurance you have within your superannuation. Make sure to assess:
- The type of coverage you have (life insurance, TPD, income protection).
- The amount of cover provided.
- How much you’re paying in premiums for the cover.
Types of Insurance Available Inside Super
Superannuation funds typically offer three main types of insurance:
- Death Cover: A lump sum payout to your nominated beneficiaries upon your death.
- TPD Insurance: A lump sum benefit if you become totally and permanently disabled due to illness or injury and are unable to work in any occupation for which you are qualified by education, training, or experience.
- Income Protection Insurance: Provides a monthly benefit if you are unable to work for an extended period due to illness or injury, beyond the waiting period.
Please note that as of 1 July 2014, ‘Own Occupation’ TPD insurance and Trauma insurance are no longer available through superannuation, including Self-Managed Super Funds (SMSF).
Life Insurance Inside vs. Outside of Superannuation
Why Hold Insurance in Super?
Insurance within superannuation offers a convenient and cost-effective way to secure coverage, as it automatically includes death and TPD insurance. The option to add income protection is often available as well. A key advantage of holding insurance in super is that the premiums are paid from your super balance, meaning there are no direct out-of-pocket costs.
Is Insurance Through Super Worth It?
The suitability of life insurance through super depends on your individual circumstances and those of your family. Keep in mind that claiming life insurance through super can be more complex, as you must satisfy both the insurance company’s terms and the Superannuation Industry (Supervision) Act (SIS) conditions of release.
To determine whether superannuation-based life insurance is the right option for you, consider whether the coverage is sufficient to protect your family and financial commitments, such as outstanding loans, in the event of your death or inability to work due to illness or injury.
Is It Wise to Pay for Life Insurance via Superannuation?
Since premiums are paid from your superannuation account, there are no direct out-of-pocket costs. However, be mindful that these payments could erode your retirement savings over time.
Maximizing the Benefits of Insurance Inside Superannuation
Recent developments in the insurance industry have introduced flexible ownership structures, enabling policyholders to optimize their coverage:
- Flexible Policy Linking: This allows you to hold a combined policy (life insurance with trauma and/or TPD) but split the ownership between self-owned and superannuation-owned. With flexible linking, you can hold life insurance within super and trauma/TPD insurance outside of super, benefiting from a combined policy.
- Split TPD: You can split the ownership of TPD insurance between self and super-owned components. This allows you to hold the “Own Occupation” portion of your TPD insurance outside of super and the “Any Occupation” portion within super.
- Split Income Protection: Some insurers allow you to split income protection between personal ownership and super ownership. This enables you to pay premiums from your super account while still accessing benefits available from policies held outside of super.
How to Claim Superannuation Insurance
To make a claim for insurance held within your superannuation, you will generally need to notify your super fund and complete the necessary claim forms. For a claim to be successful, you must:
- Meet the insurer’s definition of a claimable event, as per their terms and conditions.
- Comply with the rules outlined in your super fund’s trust deed.
- Satisfy the conditions of release as per SIS regulations, which include death, terminal illness, “permanent incapacity” for TPD, or “temporary incapacity” for income protection.
Comparing Insurance Inside Super Policies
You can compare insurance inside super policies online in just a few minutes. By using a comparison service, you can review pricing, benefits, and features side-by-side from some of the largest life insurance companies in Australia.
Here’s how to get started:
- Select the policy type that meets your specific needs.
- Enter your desired cover amount in the quote form.
- Compare and review insurance policies side by side.
- Apply, and a specialist will contact you to finalize the process.
Frequently Asked Questions (FAQs)
Is Life Insurance Through Super Tax-Deductible?
Premiums paid by your super fund may be tax-deductible to the fund. While death benefits are usually tax-free, taxes may apply if the benefit is paid to a non-tax-dependent, such as an adult child or business partner.
Can I Have Both a Self-Owned and Super Life Insurance Policy?
Yes, you can hold multiple life insurance policies—whether through superannuation, purchased directly from an insurer, or through an insurance broker. Whether it’s right for you depends on your specific needs, such as having a family or outstanding debts.
Do All Super Funds Offer Life Insurance?
Yes, all super funds must provide default insurance coverage, including death and TPD insurance. However, if you have not contributed to your fund in the past 16 months and your balance is below $6,000, your insurance may be cancelled.
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Author Profile: Jeffrey Liu, JP, is the founder and principal adviser of Hippo Insurance (aka: Hippo Wealth), with a deep expertise in wealth protection. His extensive experience includes roles in the wealth management divisions of Westpac, ANZ, and a local multi-family office. As the host of “Riches Talk,” a podcast dedicated to cultivating personal and business growth, Jeffrey has established himself as a thought leader in developing life riches. His insights have been featured on SBS, The Australian, and Channel 7. Notably, he was a semi-finalist on Australia’s Got Talent in 2010. Learn more at http://www.hippoinsurance.com.au
