Superannuation Life Insurance

Information verified correct on September 3rd, 2015

Looking to pay for your life insurance through your super or just want to know how it works?

You probably already have some life insurance through your superannuation but may not be sure if it is enough? It is worth reviewing your current cover to see if you should increase it or you may wish to fund a new non-super fund policy with the funds from your superannuation.

Super funds that have been organised by employers are required to offer at least a minimum level of life cover. This is usually at a very competitive rate as the cover can be provided under one “group” policy which enables the employer to divide the risk across many people at once. You can usually choose to increase, decrease or cancel the cover provided from in this fund.

  • Death cover, TPD and Income Protection are generally available through your super fund
  • The premium is paid from funds that have accumulated. These premiums are generally tax-deductible
  • Some insurance companies allow you to apply for cover with them but continue to fund the cover from your superannuation by performing a superannuation rollover
  • Premiums are automatically deducted from your superannuation
  • Read on to learn more about life insurance through super or enter your details in the form below to speak with an adviser about your current policy and potential options for funding your insurance through superannuation

Make an enquiry to fund your life insurance through super

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Level of Protection
Coverage is the amount of money that you will be paid in the event of a claim. An insurance consultant can help you determine an appropriate amount. Calculator
TPD Cover
Provides a lump sum payment if you become totally and permanently disabled and are unable to return to work.
Trauma Cover
Provides a lump sum payment if you suffer a serious medical condition. Cover can be taken out for 40-60 medical conditions depending on the policy you choose.
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Benefits and drawbacks of life insurance through super

While taking out life insurance through super can be an affordable option, you need to make sure that you understand exactly how the features and benefits differ from a standard life insurance policy, and how you can make sure the coverage suits your needs. Of course, there are a number of benefits to getting life insurance through your super fund. These include:

Benefits

It is usually cheaper

The super fund is generally able to buy life insurance in bulk, and therefore negotiate a cheaper rate. It means that it can be an inexpensive way to purchase life insurance.

No medical required

As the insurance is usually taken out as a group policy through the super fund, individual medical checks aren’t required.

Tax benefits

The premiums which pay your life insurance come from your contributions, or those made by your employer to your super fund. Therefore, if you are self employed the premiums can be a tax deduction, and if your contributions are made as part of a salary sacrifice, then they are paid from your pre-tax income.

Abolition of Reasonable Benefit Limits (RBL)

Until July 2007 when the RBLs were abolished, life insurance benefits paid from a super fund could be included in an individual’s RBL, which could create tax issues for those people with a lot of super. However, these constraints are no longer an issue.

Most super funds include some level of life insurance cover

This means that even if you haven’t thought about taking out life insurance, you don’t think you need it, or you don’t know where to start, even if something happens to you in the process of choosing a life insurance policy, you are likely already covered to some extent through your super fund.

Drawbacks

The cover amount available may be less than you need

Because these are generic policies, the amount of life insurance through super is generally less than you would ideally need

The benefit is paid to the super fund

This can mean that there is a delay from the time of your death to the time that your family receives the benefit amount from your life insurance policy.

You’re not in complete control of choosing your beneficiary

You will need to look at whether a life insurance policy through your super fund allows you to make a binding beneficiary nomination, otherwise you can’t ever be sure that the benefit payout will go to the people you’ve chosen. In many cases the trustee of the super fund has absolute discretion over who receives the death benefit, where all potential beneficiaries are required to come forward and express an interest in the benefit payout.

Tax requirements

There are more limitations on who can receive a tax free payout from a super fund life insurance benefit, and whose benefit will be taxed. For example, life insurance benefits from a super fund policy are generally only tax free if the beneficiary is a dependent such as a spouse, a child under 18, or anyone else who can be shown to have been financially dependent. When the benefit is paid to anyone who is not a dependent, the amount will be taxed at 16.5%. However, these tax rules do not apply to a life insurance policy which is held outside of a super fund.

Alternatively, you may want to consider a life insurance policy that is popular with many Australians - term life insurance. When the cover is arranged outside of superannuation it provides a lump sum payment to your family in the event of your death or terminal illness directly to the person nominated on the policy to receive its proceeds. It is available to people aged between 17 and 69 years of age and can usually be renewed until the policy anniversary date prior to the insured’s 99th birthday.

Compare Term Life Insurance Quotes from Leading Australian Providers

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The growth of super fund life insurance in Australia

Before superannuation became compulsory in Australia, most people took out life assurance policies that included a share in the investment made by life insurance companies with the money they derived from the premiums paid by the policy holders. This was known as whole of life assurance.

These policies expired when the policyholder reached a predetermined aged, generally 60 or 65 years of age, at which time the policy would be paid out. If you died before reaching the expiry date, the policy paid out the insured sum to your beneficiary. The interest earned on whole of life policies was small when compared to what you could earn by placing the same amount of money in a savings account.

Term life insurance was available and it was sold at a much cheaper rate than whole life policies. However, it was less popular among Australians due to the fact that you would not receive any benefit payment if you outlived the term of your policy. Although, term life insurance has since been enhanced to provide guaranteed future insurability for policyholders.

The arrival of compulsory superannuation brought a dramatic shift to the market, as a person could now benefit from comparatively high interest earnings from the contributions being made into the fund while benefiting from the much cheaper term life insurance component if you happened to die prematurely. The life insurance purchased through a superannuation fund was also obtained at a cheaper rate again and more tax effective than it would be if purchased separately. This arrangement became very popular with the result that most people now purchase their life insurance in this way.

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Salary continuance insurance (Income protection through super)

In addition to receiving benefit payments for life cover, super fund members can also receive benefit payments in the event that they are unable to work due to serious sickness or injury. This type of policy is known as Salary Continuance or Income Replacement.

If the super fund member satisfies the requirements laid out in the fund trust deed, they are eligible to receive an ongoing monthly benefit while they recover (usually 75% of their regular income). As with standalone income protection policies, benefits periods are generally two, five, or 10 years or until the policyholder reaches the age of 65.

Assess your income protection needs through super

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Types of life insurance through super

Beside life cover and salary continuance insurance, total and permanent disability (TPD) cover is available through super. However, it is important to note that TPD definitions available through superannuation may generally be restricted to Any Occupation TPD. Own Occupation TPD Insurance and Trauma Insurance are no longer available through superannuation.

Learn more about TPD cover obtained through super

Trauma insurance is rarely offered through super due to certain restrictions that affect the policyholder's ability to satisfy the 'sole purpose' test and the conditions of release (of the benefit amount). These rules and conditions are quite complex and often present great difficulty for the policyholder to gain access to his/her trauma benefit.

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How is Life Cover Through Self Managed Super Fund Different?

Recent years have seen an increase in popularity of life insurance through Superannuation funds whereby their SMSF trustee becomes the owner of the policy and is responsible for making the premium payments. In the event of a claim, the benefit is not paid to the policyholder but to the fund. The Trustee will distribute the benefit payment to the policy beneficiaries.

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How does life cover through self managed super funds work?

SMSF Life Cover

What are the advantages and disadvantages of SMSF Life Insurance?

Advantages
Disadvantages
  • Cash FlowAs the insurance policy is owned by the SMSF, premium payments will be made with funds that have already been accumulated. This means that employer super contributions can be directed straight towards premium payments. Essentially, the stress of covering your next premium payment is removed.
  • Tax ConcessionsA key benefit of taking out life cover through a SMSF is the tax concessions. Members are generally able to claim insurance premiums as a tax deduction of the fund.
  • Limited Range of CoverMany SMSF Life Cover policies will only provide the bare minimum level of coverage and will not offer the additional benefits available in standalone policies i.e. rehabilitation expense benefit, accommodation benefit etc.
  • Reduction of Retirement FundsAs premium payments are made from the members retirement savings, the funds they have accumulated for their retirement will have greatly reduced. Members can make additional payments to their fund to offset this cost.
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Benefits of having sufficient Life Insurance through super?

Life insurance can therefore protect your family by providing a lump sum payment in the event of your death or diagnosis of contracting a terminal illness for which you are not expected to survive more that 12 months. It can be used to provide the following:

  • Family education expenses.
  • Mortgage and other loan repayments.
  • Ensuring that your business will survive even if you are not there personally to do so yourself.
  • Meeting all the lifestyle costs demanded by a family.
  • Payment of funeral costs and any medical expenses that may have been incurred.

Many families struggle to survive after the death of the main income earner and the knowledge that at least there will be no financial burden left behind can give a person tremendous peace of mind.

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10 tips you should know about life insurance and superannuation

There is no doubt that having life insurance through superannuation can have several benefits. However, if you are not aware of the various rules governing life insurance through superannuation, you may not be able to take full advantage of the same. There are 10 important tips that you should know about having life insurance through your super fund:

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  1. Take advantage of cost-effective insurance cover: When you choose to buy life insurance through superannuation, you should get the benefit that comes with group buying. Since your super fund is likely to be purchasing life insurance policies on behalf of a large group of people, insurance companies should offer competitive rates for the same, which help to make the cover more cost effective for you.
  2. Life insurance for Self Managed Super Funds: If you are in charge of a Self Managed Super Fund (SMSF), you need to ensure that buying life insurance through superannuation is a decision that is beneficial for every member of your fund, according to their specific situation. If the decision does not tie in with the investment strategy of the fund, you may have to rethink the decision.
  3. Nominate your beneficiaries clearly: If you want the proceeds of your life insurance policy to go to specific beneficiaries, you should nominate them clearly. This is especially true if you have small children. Nominating a proper beneficiary in such circumstances is extremely vital so that your insurance benefits as well as your super benefits will go to your intended heirs.
  4. Tax liability for non-dependant beneficiaries: If the beneficiaries of your life insurance proceeds through super are people other than your spouse, your kids, or financially dependent persons, then they will have to pay tax on the money that they receive through your super fund. This is not so when life insurance is purchased outside super.
  5. Minimum levels of life insurance cover: Even if you have decided not to choose your own super fund, you should be aware that the law in Australia makes it mandatory for your employer to contribute into a super fund and that the fund should provide you with a minimum level of life insurance cover. This can be very useful to those who do not have any other type of life insurance cover.
  6. Added cover for disability: Most super funds offer added cover for disability when you choose to purchase life insurance through superannuation. If your super fund also works along the same principles, you can benefit from the added cover if you become disabled and cannot continue to work for a while.
  7. Automatic acceptance for life insurance cover: Most super funds offer their members an automatic acceptance for a specific level of life insurance cover. This means you do not have to prove your eligibility for the cover, nor do you have to undergo medical examinations for the same. This can be especially useful for people who have a difficult time getting insurance outside of super.
  8. No automatic acceptance for your own super fund: As mentioned in the previous point, you can take advantage of automatic acceptance by opting to buy life insurance through superannuation. However, you need to be aware of the fact that if you are choosing your own super fund, you may not be eligible for this benefit. This benefit is usually available to those people who opt to become part of a super fund that their employer has a special arrangement with.
  9. Added cover for income protection: Another advantage of purchasing life insurance through superannuation is that you can choose income protection as an ancillary cover within your core life insurance policy. This helps you to protect yourself and your loved ones from a loss of income arising from serious illnesses and disabilities.
  10. Fulfilling the conditions of release: This is a vital consideration if you are thinking of buying life insurance through superannuation. You should know that every super fund has certain conditions of release for benefit payouts. Only if those conditions of release are satisfied will your beneficiaries be eligible to receive any money from your super account. Therefore, if there is any ambiguity or doubt in your mind whether a certain circumstance will fulfil the conditions of release or not, you may want to consider buying life insurance outside superannuation.
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Frequently asked questions

Understanding life insurance through your super fund can be a whole new learning curve for you, so following are the answers to some questions you might have:

  • Q. Do you need life insurance in addition to the coverage you get through your super fund?

A. In many cases, yes you do need additional coverage as the life insurance coverage amounts available through superannuation are generally lower than those offered by life insurance companies independently, and may not be enough to cover your expenses.

  • Q. What types of insurance are available through superannuation?

Depending on your super fund provider, you can generally access life insurance (also known as death cover), total and permanent disability insurance (TPD), and income protection insurance (also known as salary continuance insurance).

  • What happens to your super fund life insurance when you die?

The trustee of the super fund will decide how the benefit amount is distributed.

  • How are beneficiaries nominated through super fund life insurance?

You can nominate your beneficiaries in any way you choose, but you will need to understand the terms and conditions of your super fund, to know when, how and if those nominations are valid.

Taking out life insurance can seem like just another expense, and something else you need to invest a lot of time and effort into. Therefore, when you find that you can easily take out life insurance through your super, and that you may already have protection through your super fund, it can feel like a huge weight has lifted.

However, before you settle that load on the ground, just take some time to check into the type of coverage you’re really getting through your superannuation, because while it can be the right form of coverage and benefit level for some people, your life insurance isn’t something you should take for granted – for your family’s sake.

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What are the Benefits of Life Insurance Outside of Superannuation?

While funding your life insurance through superannuation may be a more affordable option, there are some key benefits of funding cover outside super that may lead you away from this option:

  • More cover: Less restrictions on sum-insured to be applied for.
  • Straightforward claims and benefit payment process: Much more straightforward process for the payment of benefit in comparison to cover inside superannuation where it is first paid to the fund trustee.
  • More cover options: More types of cover and greater selection of policies available outside of super. Trauma Insurance is not available through superannuation.
  • Retirement funds: You are not chipping away at the hard-earned retirement funds in your superannuation.
  • Tax-free benefits: The benefit payments are tax-free regardless of the beneficiary it is paid to.
  • Own Occupation: Own occupation definition of disability is only available for TPD insurance outside of superannuation.
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Flexible linking: combine your life cover inside super with policies outside of superannuation

You can now link your existing life insurance in super with policies outside super, such as income protection, TPD and trauma cover, with a new feature called flexible linking. This feature enables policyholders greater flexibility in managing their life insurance policies inside and outside of super, without sacrificing the quality of cover that they require. Currently, flexible linking is only available through select providers.

Learn more about Superannuation Life Insurance Flexible Linking Feature

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Compare superannuation insurance online

While Life insurance through super can be an affordable option for many Australians, it is essential that people understand that in most cases it will only provide a minimum level of cover. While group policies from employees may be cost effective, they do not take into consideration the individual needs of each of the members.

Ensure you know exactly how much you are insured for and if there is a significant gap between the benefit payment and what would be needed for your financial dependents to be financially secure if you were no longer around. Ensure you have a clear understanding of the claims process of your super fund life cover and put in place a binding nomination for your desired beneficiaries.

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4 Responses to Superannuation Life Insurance

  1. Default Gravatar
    Helen | April 29, 2015

    Do all superannuation companies cover total and permanent disability insurance

    • Staff
      Richard | April 30, 2015

      Hi Helen,

      Thanks for your question. Most super funds offer TPD but I can’t say for a fact that all providers offer that cover.

      I hope this was helpful,
      Richard

  2. Default Gravatar
    Brian | August 9, 2013

    Can you please provide me a list of Superannuation Funds that include life insurance and you have to pay any extra amount.

    Thanks
    Brian

    • Staff
      Claude | August 9, 2013

      Hi Brian,

      There are a number of different super funds that offer life insurance cover, or you can opt for cover with a Australian life insurance provider and choose to hold the policy within a superannuation environment.

      You may wish to speak to one of our insurance advisers who can provide you with more information on life insurance through superannuation funds. You can request a call back by filling in your details on the enquiry form. This service is free-of-charge and you are under no obligation to sign up.

      All the best with your enquiry.

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