Life insurance in and outside super – what’s the difference?

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Life insurance in and outside super – what’s the difference?

Save money on life insurance inside super

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Here are the benefits of insurance inside and outside super.  

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More than 70% of Australians hold life insurance policies through their super fund.¹ While this is a popular way of protecting yourself, it’s not the only way to get life insurance. 

Every stage of life – marriage, childbirth and buying a home, purchasing an investment property, or planning your retirement – brings with it financial obligations. The best way to meet these commitments will vary for each life stage and your individual needs. 

The question of whether to protect yourself by opting for life insurance inside your super fund or outside of it, or a combination of both, will depend on your personal requirements. It’s worth considering the following differences when deciding. 

Medical check-ups

Most super funds will accept you for a default level of insurance cover without health checks. This can be useful if you work in a high-risk job or have health conditions that can make it difficult to get insurance outside super. 

You can usually take out extra cover above the standard level, but your fund may ask you to complete a medical questionnaire. It’s important to check your fund’s product disclosure statement or insurance guide for exclusions and considerations of pre-existing conditions.

If you opt for insurance outside super, your insurance provider will assess you on an individual basis. They’ll consider your age, health, lifestyle and job and tailor your cover accordingly. This may mean higher premiums for some but may also allow greater flexibility of cover for others. 

Costs and tax benefits

The convenience, cost and tax effectiveness of life insurance paid within a super fund can be hard to beat.

Premiums are often cheaper as super funds are able to negotiate and purchase insurance policies in bulk. Also, some funds may include total and permanent disablement (TPD) insurance and income protection (IP) insurance with life cover, potentially making it cheaper than seeking insurance elsewhere.

They’re also easy to pay, with premiums being automatically deducted from your super balance by your employer, or through other contributions such as salary sacrifice. This means you don’t have to pay premiums from your own pocket, making it easier on your immediate cash flow. 

And, your employer's super contributions and salary sacrifice contributions are taxed at 15% – lower than the marginal tax rate for most people, making paying for insurance through super tax-effective.

On the flip side, it’s important to remember that insurance premiums deducted from your super account reduce your super balance which reduces your retirement savings.

Insurance premiums outside super are paid from your own bank account and are generally not tax deductible.  You effectively pay them from after-tax money. An exception is premiums paid for IP insurance, which are often tax deductible. 

Payouts 

Claim payouts to super fund members or beneficiaries can potentially take longer than insurance payouts outside super as the insurer needs to pay the super fund, which then pays you. 

Despite this, data from the Federal Government’s moneysmart.gov.au website indicates that death cover claims through super are currently resolved within one month compared with 2.8 months directly through an insurer.²

For more advice, try ASIC’s life insurance claims comparison tool³ https://moneysmart.gov.au/ to see how different life insurance providers inside and outside super funds accept and handle claims and how soon they pay them out.   

Level of cover

It’s important to remember that default insurance through your super fund hasn’t been tailored to your personal circumstances. And while standard levels of cover can be appropriate for young, single people at the early stages of their career, they may not be as suitable for those with an established family or considering their future retirement. 

You’ll need to determine what cover you have through your fund and what level of cover you require for your immediate and longer-term needs. Some eligibility requirements may apply.

If you change funds or stop contributing to super or your super account becomes inactive, your cover may cease and you could end up with no insurance. Cover could also stop at an earlier age than through insurance outside super. It’s important to review and update your details regularly. 

The levels of insurance cover available outside super can be more flexible, depending on your age and your health, and can be tailored for you. 

Types of cover

While life, TPD and IP insurance are available through super, trauma insurance is not.

Policy ownership

If you hold insurance inside your super, the trustee of the fund owns the policy and may make changes to it. If you hold insurance outside super, the terms of the policy don’t change provided your premiums are paid.

¹ ‘What are the advantages and disadvantages of having life insurance through your super fund?’, Ellie McLachlan, Canstar, 19 January 2021, accessed 20 September 2022
² Life insurance claims comparison tool - Moneysmart.gov.au
³ Life insurance claims comparison tool - Moneysmart.gov.au