Life insurance and super: 10 things you should know

One of the best deals in superannuation has only a slight connection to your life in retirement. Life insurance cover within super funds rarely makes the headlines but for many Australians they are getting cost-effective cover from their super funds.

Life insurance is insurance that pays out in the event that you die before your time, and before retirement age. It’s difficult enough to get many Australians interested in superannuation and retirement, so to then take it one step further and encourage Australians to talk about the possibility of dying is near impossible.

We have a compiled a list of 10 important facts that we hope will give you a greater understanding of the relationship between your super account and life insurance and other types of insurance. Here’s the list:

1. Competitive life insurance cover, in most instances. If you’re a member of a large super fund (such as an industry fund or retail fund or public sector fund), and you joined the super fund via your employer, then you’re likely to have access to an excellent deal in life insurance.  In most cases, any super fund that you have joined via your employer, will provide life insurance at very competitive rates because you will be covered under a ‘group’ policy rather than individual policy which spreads the risk over a greater number of people and generally means better rates. For some individuals however, such as young healthy women, the group rates may be slightly higher than if they applied for life insurance as an individual, although the benefits of having your super fund pay the premiums often outweighs the cost difference.

2. SMSFs must consider life insurance. If you run a self-managed super fund, then you need to be aware that you must consider the life insurance needs of each SMSF members when considering your fund’s investment strategy. This requirement does not mean that you must take out life insurance within your SMSF.

3. Minimum cover when don’t choose your super fund. If you don’t choose your own super fund, then your employer must have chosen a super fund that provides minimum life insurance cover. Fortunately, most Australians are members of super funds that provide at least minimum cover in the event of a member’s death. If you choose your own super fund, you don’t have to have life insurance cover within your super account (see Point 9 below).

4. Looking after your children in worst-case scenario. If you have children or other dependants, then thinking about life insurance and what would happen if you die, is a necessary albeit confronting exercise. If you have life insurance cover via your super fund, and you die, do you know who will receive the life insurance payout? Equally, do you know who will receive your super benefits when you die? The answer to this question is very important for two reasons. One, if you don’t nominate your beneficiaries (and even sometimes when you do), the super fund may pay out your insurance and benefits to someone you didn’t expect. Two, insurance payouts to non-dependants are subject to a hefty tax bill, while insurance payouts to dependants are tax-free. I explain the difference between dependants and non-dependants in other SuperGuide articles.

5. One in five parents unable to work, or die before retirement age. If the fate of your children or spouse is not enough incentive, then the disturbing findings from a recent study should motivate you to at least review your existing life insurance cover (if you have any). According to the Lifewise/NATSEM Underinsurance report (released in March 2010), one in five parents will be unable to work, or will die before retirement age. I explain the findings of this report in the article Life insurance: one in five parents will die early, or be too sick to work.

6. Disability insurance can be even more valuable. Your life insurance cover is usually packaged with disability insurance, which means your super’s insurance policy also covers you if you become permanently incapacitated in specific circumstances.

7. Income protection insurance. Some super funds also offer you income protection insurance, in the event that you are unable to work for a period of time due to illness or injury.

8. Automatic basic cover.  Many super funds automatically provide members with basic insurance cover. The deal with basic cover is that you don’t have to undergo a medical to receive this cover, or pay higher premiums when you suffer a pre-existing health condition. Under automatic cover, you can expect one or two units of death and permanent disability cover, which is a dollar amount based on your age, and sometimes, based on your occupation. This level of insurance is generally not an adequate level to look after your family if you become sick, or die, but at least it’s a good start. You may belong to a super fund that automatically gives you basic income protection cover if you temporarily can’t work because of illness or injury. Or you may belong to a super fund that automatically provides basic death cover only.

9. Choosing your own super fund may mean no life cover, or more expensive cover. Automatic basic insurance cover is only available under certain circumstances. You generally have access to basic cover if your employer is an employer sponsor of the super fund. What this means is that your employer has a contractual arrangement with the trustee of the superannuation fund to pay super contributions. If you join a fund as an individual rather than via an employer-sponsored arrangement, you don’t automatically receive basic insurance cover. In these circumstances, you must complete a personal health statement detailing your medical history. You may also need to have a medical assessment.

10. Taking out extra cover. For most Australians, basic cover will not be sufficient to look after your family if you get sick or die. If you want to take out extra cover with your super fund, you’re likely to have to undergo a medical, or at least complete a comprehensive medical questionnaire. The premiums for any extra cover that you take via your super fund, is then deducted from your super account.

In summary, super funds can provide fund members with three types of insurance cover:

  • Life insurance (or death benefit) cover
  • Total and permanent disability (or invalidity) insurance (TPD)
  • Income protection (or salary continuance) insurance
© Copyright Trish Power 2009-2014

Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.

IMPORTANT: SuperGuide does not provide financial advice. SuperGuide does not answer all questions posted in the comments section. SuperGuide may use your question or comment, or use questions from several readers, as the basis for an article topic that we publish on the SuperGuide website. We will not disclose names or personal information in these articles. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Readers need to seek independent advice about their personal circumstances.


  1. jackie erving says:

    can you help please I have a personal insurance and insurance protection, then I am also paying for insurance through super. would it be best to cancel my personal insurance as this is a lot money paid out in a month or can I stop my super insurance. total confused as what to do

  2. I have two super policies….I’m 54 and not sure whether to ‘roll them into one’ or leave as is…first with Hesta.. had for eight or so years putting $1000 into it over past two years…as no longer work for the company …current company super is with ‘Rest’ had for 6/7 years…. Now if I should die would both supers pay out a death benefit as I worry my husband would be left with mortgage and I have nothing much to contribute in way of retirement. I have income protection insurance with rest. Or should I just roll it over to the one poliicy ?… I do not think healthwise I would live to see 60…. your thoughts would be grateful as I want the best for my husband and two teens.

  3. My concerns with having insuance via super is how much you then lose from your super.

    Money goes in = is taxed & agent collects their fees
    Money comes out to pay ‘included’ insurance = money movement fee
    Money is used to pay the insurance = yet another commission payment

    This all comes from the super capital, which reduces the capital therefore any interest (if there is any) is also reduced.

    It’s bad enough being charged (mis)management fees, without losing more unnecessarily.

    Pay at least your employment insurance out of your pay – wait until June if possible, so you can claim it back almost straight away.

    As for the life insurance, work out what you’re losing from your super & look for a better offer. Either way, always remember – insurance companies are worse than the ATO – at least the ATO will pay what they owe you, insurance companies will always look for the most insignificant reason to not pay.
    Can’t have the bonuses reduced, can we.

  4. Peter kenneally says:

    Thanks for that: I have been caught out because I have received payouts from my brother’s pension funds in the UK and been assured they were tax free: but of course that’s only true there….do you know if a payout from a non-super based life insurance policy is also taxable?

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