Insurance Through Superannuation: Your Complete Guide to Life, TPD, and Income Protection Cover

Most Australian super funds automatically provide some level of insurance cover for their members, yet many people have little understanding of what protection they actually have. Insurance through superannuation can be a cost-effective way to protect yourself and your family, but it is not a one-size-fits-all solution. This guide explains the types of insurance available through super, their benefits and limitations, and how to determine whether your current cover meets your needs.

Types of Insurance Available Through Superannuation

There are three main types of insurance commonly offered through superannuation funds: life insurance, total and permanent disability insurance, and income protection insurance. Life insurance, also known as death cover, pays a lump sum to your beneficiaries if you die while covered by the policy. This payment can help your family maintain their lifestyle, pay off debts like mortgages, and cover ongoing expenses in your absence.

Total and Permanent Disability insurance, commonly called TPD, provides a lump sum payment if you become permanently disabled and are unlikely to ever work again. The definition of disability varies between policies, with some covering inability to work in your own occupation while others require inability to work in any occupation for which you are suited by education, training, or experience. Income protection insurance replaces a portion of your income, typically up to 75 per cent of your pre-disability salary, if you are temporarily unable to work due to illness or injury. This cover usually continues for a specified benefit period, commonly two or five years, or until you return to work.

Advantages of Holding Insurance Through Super

One of the primary advantages of insurance through super is the cashflow benefit. Premiums are paid from your super balance rather than your take-home pay, making cover more accessible for those who might struggle to afford premiums from their regular income. For many Australians, this means having some level of protection that they might not otherwise have obtained. Additionally, because premiums are paid with pre-tax money in many cases, there can be effective tax advantages compared to holding the same cover outside of super.

Group insurance through super funds often provides automatic acceptance, meaning you may receive a base level of cover without needing to provide detailed health information or undergo medical examinations. This is particularly valuable for people with pre-existing health conditions who might struggle to obtain cover in the retail insurance market. Super fund insurance is also generally simpler to set up and maintain, with premiums automatically deducted and cover continuing as long as you remain a member of the fund with sufficient balance to cover premiums.

Limitations and Considerations

Despite the advantages, insurance through super has several important limitations that you should understand. Default cover levels are often insufficient for people with significant financial responsibilities such as large mortgages, dependent children, or non-working spouses. A common default life insurance amount of two to four times annual salary may sound substantial but can be quickly exhausted when paying off debts and providing ongoing family income.

The premiums paid for insurance directly reduce your retirement savings, and over a working lifetime, this impact can be significant. It is essential to ensure you are not paying for more cover than you need or for duplicate cover if you hold insurance policies outside of super as well. Furthermore, income protection through super typically has restrictions that may not apply to policies held outside super, such as limited benefit periods and stricter definitions of disability. The tax treatment of insurance payouts from super can also differ from retail policies, particularly for TPD claims, which may be subject to taxation depending on your age and the components of your super balance.

Assessing Your Insurance Needs

Determining the right level of insurance cover requires careful consideration of your personal circumstances. Start by calculating your family's financial needs if you were to die or become permanently disabled. Consider outstanding debts including mortgages and personal loans, ongoing living expenses for your dependents, education costs for children, and any specific financial goals you want to provide for. Compare this total to any existing assets, investments, and your partner's income capacity to determine the gap that life and TPD insurance needs to fill.

For income protection, consider how long you could survive without your regular income and what your ongoing expenses would be during a period of disability. Remember that income protection typically covers only a portion of your salary and may have waiting periods of 30 to 90 days before payments begin. Use our superannuation calculator to see how insurance premiums might affect your long-term retirement balance, and weigh this against the protection the cover provides. The goal is to find the right balance between adequate protection and preserving your retirement savings.

Reviewing and Adjusting Your Cover

Your insurance needs change throughout your life, so regular reviews are essential. Major life events such as getting married, having children, buying a home, or paying off a mortgage should all trigger a review of your cover. A young single person with no dependents may need minimal life insurance, while a parent with young children and a large mortgage may need substantial cover across all three insurance types.

When reviewing your cover, request a copy of your current insurance policy details from your super fund. Check the cover amounts for each type of insurance, the premium costs, and importantly, the definitions and conditions that apply. Pay particular attention to TPD definitions, as these vary significantly between policies and can determine whether you would actually receive a payout in the event of a disability. If your default cover is insufficient, most super funds allow you to apply for additional cover, though this may require health assessments and could be declined or offered at a higher premium if you have health conditions.

Recent Changes to Default Insurance in Super

The Protecting Your Super and Putting Members Interests First legislative reforms introduced significant changes to how insurance operates within super. Since 2019, super funds can only provide automatic insurance to members who are 25 years or older and have an account balance of at least $6,000. Members with inactive accounts, defined as those receiving no contributions for 16 continuous months, may have their insurance cancelled unless they elect to maintain it.

These changes were designed to prevent insurance premiums from eroding small or inactive super balances, but they mean that some members who previously had automatic cover may no longer have it. If you are under 25, have a balance under $6,000, or have an inactive account, you should check whether you have any insurance cover and consider opting in if protection is important to your circumstances. Contact your super fund directly to confirm your current insurance status and discuss your options for obtaining or increasing cover.

Conclusion

Insurance through superannuation provides a convenient and often cost-effective way to obtain essential protection for yourself and your family. However, the default cover provided by your super fund may not adequately meet your specific needs, and the premiums paid reduce your retirement savings over time. Understanding the types of insurance available, their benefits and limitations, and how to assess your personal requirements is crucial for making informed decisions.

Take time to review your current super insurance arrangements and consider whether adjustments are needed. If your circumstances have changed or you are unsure whether your cover is adequate, speak with a financial advisor who can help you determine the right level of protection while balancing your retirement savings goals. Remember, the purpose of insurance is to provide security and peace of mind for life's unexpected events, but only if the cover genuinely matches your needs.