Many of us consider life insurance so that our families can be financially secure if the worst were to happen. In addition, many of us also have superannuation accounts that we may or may not keep a close eye on. In fact, two-thirds of 25-34 year-olds don’t even read their annual superannuation statement.

Did you know that you may already have life insurance through your superannuation account?

As a matter of fact,

  • Roughly 70% of people have life insurance through their superannuation, equating to roughly 13.5 million policies!
  • A little more than half of Australians are unaware they have life insurance.
  • Depending on your age, according to ASIC, default super funds must have a minimum level of life insurance (this helps explain why so many Australians are already covered).

The cost of taking out life cover through your super

Your life insurance policy will typically be cheaper through a superannuation fund – which is great for families on a budget. Additionally, premiums are paid for out of your superannuation balance, rather than your taxable income. This acts as a serious tax perk.

As an added bonus, your life insurance may bundle together other types of cover, such as income protection – with the possible exception of trauma cover*. All in all, there’s a lot of value in this product for a relatively low price.

That being said, you have to consider the money that’s going towards your life insurance that isn’t going towards your superannuation. This could affect your retirement savings in a big way.

How coverage works

You may ask, “Why is life cover through super so cheap?” Typically, your death benefit it limited to $100,000 or $200,000. This highlights an important issue facing a vast majority of Australians: underinsurance. A young family may need roughly $680,000 worth of cover, and the death benefit is typically well under this for these kinds of life insurance policies. This is a difference of approximately $480,000.

Worse still, coverage may end as soon as you stop contributing to your super, or you switch super funds. It may also cease once you reach a certain age – typically, 65 or 70. Finally, income protection coverage may last no longer than two years, which could be insufficient if you’re recovering from a serious illness or injury.

Setting up life insurance through your super fund

One of the most confronting things many Aussies deal with when taking out advised life insurance is getting the cover in the first place. It requires an exhaustive application process, including a medical, to determine various risk factors.

However, when you get life insurance through your super fund, you won’t have to go through medical examinations, you enjoy automatic acceptance. This makes the product very appealing to some customers.

Once your life insurance is set up, it requires little maintenance, as premiums are deducted directly from your super.

Claiming life insurance through your super

When it comes to claiming on this life insurance, your beneficiaries will need to manage their expectations about the process. It pays to consider the following points:

  • The payout may be delayed. The benefit is first paid to your super fund, which acts as the middleman and pays it out to your beneficiaries (e.g. your family0. Additionally, death benefits paid out to anyone who isn’t a dependent may be heavily taxed.
  • You can’t necessarily choose who will receive your death benefit. This is by far the most significant issue with this kind of insurance. At a difficult time, this may be unnecessarily painful for your dependents or spouse to manage. However, you may be able to get around the above with a Binding Nomination, which states who you want your death benefit to be left to.
  • Your Binding Nomination only lasts a set period of time. You need to renew it once it expires. You should also keep it up to date if your personal situation changes (e.g. you get married, have children).

Why take out life insurance through your super fund?

The question remains; is this type of policy the right insurance for you? Here are the main pros and cons of taking out life insurance through your superannuation fund.

Advantages Disadvantages
Less expensive premiums/fees Risk of underinsurance is high
Easy to set up and more manageable Payouts may be delayed
It may bundle multiple products
(e.g. life insurance + disability cover)
Money is spent on insurance,
instead of your retirement
Tax benefits Issues with death benefit
No medical examinations needed to get covered Trauma insurance is not available through super funds*

* If your super fund offered trauma cover prior to July 2014, you may still be covered for it. Review your superannuation member’s statement to be sure.

Should you take out life insurance through your superannuation?

When deciding what kind of life insurance you want, a sense check is needed on the kind of cover you need. You might want to ask yourself the following questions:

  • How much will your family need to live off if you’re not around?
  • Will the process be easy for them to be able to collect the death benefit?
  • How will your retirement be affected if you’re spending money over the years towards this policy?

It’s up to you to decide if it’s worth it. We suggest you weigh up your options by comparing policies on our website. That way, you’ll be able to quickly determine how much life insurance cover is needed for your personal situation.

Want to learn more about life insurance? Here’s all the important info you might need. Plus, our comparison service can help you find great policies.

The information provided here is general only and does not consider your personal objectives, financial situation or needs. Before you decide to purchase a product, it is important to read the relevant PDS.