Life insurance inside super: Choosing the right level of cover

The expenses that your death policy should cover 

An adequate amount of life insurance depends on your income level, financial commitments and number of dependents. A young person renting with a partner may need less death cover than a married person with a young family and a large mortgage. 

It’s worth remembering that if you don’t have a partner or people depending on you financially, you may not need life cover at all. 

Expenses to consider include: 

• Debts – Include mortgages on your home and any investment or holiday properties, credit card debts, car loans and any other outstanding debts
• Living costs – Calculate your family’s normal expenses for food, clothing, travel, holidays and petrol
• Regular expenses – Include your regular household expenses, utility bills, medical and home insurance, school fees and childcare costs
• Funeral expenses – Estimate the cost of your funeral and any legal costs associated with your death 
• Housekeeper and maintenance costs – Estimate how much it would cost to perform the unpaid duties you undertake, such as home maintenance, gardening, cleaning and child minding. 

Remember that since your death cover should be sufficient to repay all your debts, you won’t need to include the usual cost of debt repayments (such as your home mortgage) in your family’s regular expenses. 

If you expect your partner to continue to work (or start working) to support themselves and any dependent children after your death, then you can subtract the amount you expect them to earn from the ongoing costs you have estimated. You can also subtract any other ongoing income your family will receive, such as rent from an investment property. 

Help calculating the death cover you need 

Now you know what expenses to consider, how can you then decide the dollar figure of life insurance to apply for? 

The cover you need is the lump sum required to repay debts and provide for the ongoing living expenses you estimated, minus your superannuation balance and any other cash or assets your family will use to support themselves if you pass away. 

Estimating the debts you’ll need to repay is usually straightforward, but working out the lump sum you’ll need to invest now to fund future income for your family is trickier. 

Thankfully, an insurance calculator or your financial planner can help. 

Check whether your super fund provides an insurance needs calculator that can give you a tailored result based on the cover your fund offers. These tools can often also tell you what the cover would cost with them. 

Alternatively, we found a helpful tool provided by AIA, one of Australia’s largest life insurers. This calculator can estimate your needs for death, TPD, income protection and trauma. Trauma insurance pays a lump sum if you suffer an insured event such as a stroke, heart attack and cancer. It is not offered through super funds, but you can apply for a policy directly with a life insurance company. 

The tool assumes your family will use your assets (including your super balance and the value of any investments) to repay debts. If you want your family to be able to keep some assets for the future instead, you can modify your results.

All calculators rely on assumptions. It’s important to read and adjust them to suit your needs and plans. 

Tax and life insurance in super

If you pass away, payment of your death cover from super will not be taxed if it’s paid to a person who is dependent on you according to tax law. Your dependants for tax purposes include your spouse/partner, your child under 18 and any person who couldn’t meet their everyday living expenses without your financial support.

Tax is payable if your death benefit is paid to a non-dependant, such as your adult children.

Life insurance benefits received from policies held outside super are tax free, no matter who receives the payment.

Other features of death cover in super you should know about

Default cover

When you join a super fund, you often receive insurance cover without applying for it or answering any medical questions.

To receive default cover when you join a new fund, you need to be 25 or older and have a balance of at least $6,000. If you don’t qualify when you join, your default cover may turn on when you do.

Under laws designed to prevent insurance premiums from eroding your balance, this default cover can be cancelled if your account is inactive for 16 months or more. Before cancelling, your super fund will contact you to ask if you want to keep it.

Pre-existing conditions

In some cases, the default insurance a super fund gives you will exclude pre-existing conditions. Pre-existing conditions are health conditions or injuries you had before your insurance started. This is known as limited cover.

Limited cover commonly applies if you didn’t join the super fund shortly after starting work with the employer that first contributed to your account, or if you were not working consistently in the months before you joined. It often becomes ‘full cover’ after two years if you’re employed and regularly attending work at that time. Full cover includes protection for pre-existing conditions.

Super funds use limited cover to protect against people who might join the fund to take advantage of the default cover when they already know their health is deteriorating. You should carefully read your fund’s insurance guide to understand when limited cover applies and when it ends.

Premium costs

Every super fund has different insurance premiums, so it’s worth shopping around. Usually, costs vary depending on the type of job you have (office or manual work) and some funds also charge different premiums for smokers versus non-smokers.

Bundled cover

If you have insurance in your super fund for both death and total and permanent disability (TPD), your death and TPD insurance may be bundled. Bundled cover means you’re insured for death and TPD together, so you can’t have a lower insured amount for death than for TPD. This can be frustrating if you don’t need death cover because you don’t have any dependants, or if you need more TPD cover than death cover.

Usually, it is possible to have a higher sum insured for death than for TPD because the fund can provide stand-alone death cover as well as bundled death/TPD.

Even if death and TPD cover are not bundled, a successful TPD claim can reduce your death cover by the amount you have claimed. Your fund’s insurance guide has all the details.

If stand-alone death and TPD policies are important to you, you can search for a super fund that offers what you need or consider insurance outside the super system. Remember to keep costs in mind.

For example, if you need TPD cover but not death cover, a bundled death/TPD policy with your super fund that is cheaper than a stand-alone TPD policy outside super could be preferable, even though it comes with death cover you don’t need. The additional protection for death could also come in handy in the future if your circumstances change.

Increasing your cover

If you don’t have any life insurance in super or you need more, you can apply for additional cover.

You can usually apply online after logging in to your super account through your fund’s website. You may be able to apply for a fixed dollar amount or choose units of cover where each unit is worth a set amount. When insurance is issued in units, the value of each unit may change as you age. Check your fund’s insurance guide for the details.

You will need to answer questions about your health and pastimes. Depending on your answers and the amount of cover you’re requesting, you may also need to complete blood tests or see a doctor for a physical examination. This process is called underwriting.

When underwriting is complete, you’ll be contacted to confirm whether your request for additional insurance has been approved, rejected or approved with conditions. Conditions could include an exclusion for a condition you’ve experienced before or an additional premium to reflect the extra risk of a claim due to existing health problems.

Before applying for more cover, check what you already have. If you have more than one super account, you may also have multiple insurance policies. Most funds offer you the option of transferring the insurance attached to another account if you commit to cancelling the original policy after the transfer.

9-step checklist for the right insurance

1. Imagine your family’s personal and financial situation if you were to die. Estimate the life insurance you would need based on the guidance above.
2. Estimate your needs for total and permanent disability and income protection. 
3. Visit your super fund’s website(s) and log in to check the cover you currently hold.
4. Review your fund’s options for increasing or tailoring your cover, including transferring existing cover from your other super fund(s) or policies you hold outside super.
5. Investigate the cost, terms and conditions, and policy definitions of insurance with your super fund and any other funds you are considering.
6. Compare the policies you have identified in super with policies outside super, including costs, terms and conditions and definitions.
7. Consider talking to your super fund or an independent financial adviser for personalised advice about your insurance needs.
8. Apply for the cover you have decided on with your chosen provider and/or make arrangements to transfer insurance from another policy.
9. Cancel any other life, TPD, or income protection policies that you’re replacing. Never cancel other cover until your new policy is in place, or you risk being left without protection.