Did you know that you might be automatically insured through your superannuation fund? Whether you realise it or not, some super funds are required to sign you up for insurance, even going so far as to take money out of your super fund to pay for it. In 2021, ASIC estimated there were almost 10 million superannuation accounts with insurance included.

While there are some benefits to insuring through super – no requirement to complete an application– this doesn’t mean it is a good thing. In fact, there are quite a few disadvantages to having default insurance through your superannuation fund, and the best thing is that it is not compulsory! You can cancel your deafult super fund insurance anytime.

What insurance can you get through superannuation?

There are typically three kinds of insurance offered through your super. These are:

• Life (or death) insurance: This provides beneficiaries with a lump sum payment in case of death.
• Income protection: This provides a source of income if you are unable to work due to temporary illness or injury.
• Total and permanent disability (TPD) insurance: This provides a lump sum payment if you become seriously disabled and are unable to work again.

How do you know if you are insured through your superannuation?

There are generally a few guidelines surrounding your superannuation insurance. If you are under 25 and have less than $6,000 in your superannuation account, you won’t be automatically covered by insurance unless you work in a dangerous job or decide to opt-in for it. Once you have met these criteria and receive employer contributions, you are likely insured.

If you aren’t sure whether or not you are insured through your super fund, there will be proof of insurance through your super fund’s annual statement. Alternatively, there will be information about your insurance through your super account. If you still can’t find it, give your super fund a call and ask directly.

What are the disadvantages of default life insurance through superannuation?

• Default life insurance is usually inadequate for most people

APRA/ASIC came out with claims statistics in 2023 that proved just how different the coverage is for insurance inside and outside of super. The average claim for life insurance policies outside of super was $509,000 compared to super fund insurance policy payouts, which sat at around $135,000. This shows just how drastically different insurance policies inside and outside super funds are.

On top of that, some super fund insurance policies have a fixed premium but the amount you are insured for changes. As you age and the likelihood of making a claim increases, your super funds insurance policy lets you down right when you need it by reducing the amount of money you can claim.

When you have an underwritten retail insurance contract, your cover will not be reduced unless you specifically request this. Some policies also offer the option to increase your level of cover without needing medical checks.

• Claims payments made through super funds can be much slower

When insured through super default the claims process is usually slower when compared to a retail policy. If you have not nominated a valid beneficiary for your Life insurance, the insurer pays the trustee of your super account, and they may be left with whom your insurance will be paid to. Regarding ‘Total and Permanent Disability Cover’ and ‘Income Protection’ The trustee is left to decide if the ‘Super conditions of release’ have been met before a successful claim is paid.

• Tax may be payable on insurance benefits under super funds

A payment from an insurer outside of a super fund is usually 100% tax free. This is not always the case for insurance inside super funds depending on whether Life insurance is paid to a valid tax dependant beneficiary – for example a child under 18, a spouse or a person with which the life insured has an interdependency relationship.

Taxing your life insurance benefits largely depends on who is receiving the payment. If the beneficiary is not considered to be financially dependent (i.e. a non-dependent child aged over 18 or other non-financially dependent persons), they could pay as much as 32% in tax for the taxable component.

Tax may be applied on ‘Total and Permanent Disability’ proceeds if the proceeds are withdrawn from super before retirement age or age 60 years. Below that age of 60 the tax payable is determined by your super eligible service date. Tax of up to 22% may be payable including a portion which will be tax free.

• Insurance premiums get taken directly from your retirement balances

Arguably the most important point to make is that your insurance premiums get taken directly from your retirement funds when you insure through your super account.

While it may be appealing and convenient to pay through your super so you don’t lose any money out-of-pocket, you may consider making additional contributions to your super to boost your super and replace any additional insurance premiums.

Still Unsure? We Can Help

Are you unsure about keeping your default insurance with your superannuation?

When you insure through Morgan Insurance Brokers, we make sure you get the best life insurance for you. We have a discussion where we learn about your needs and then develop a tailor-made plan with comprehensive coverage at the most competitive premiums.

Contact us for a free, no-strings consultation and safeguard your future.