Choosing life insurance inside or outside of superannuation

Death can be a difficult topic to broach, but when it comes to helping to preserve your family’s financial wellbeing, no conversation is more important. 

Writing a will, communicating your end-of-life care wishes and arranging your funeral are just some steps you can take now to ease the burden on loved ones when you pass.

Making sure you have adequate insurance to protect you and your dependants financially – should you die or sustain a serious injury or disability – is another effective way to lighten the load.

Many Australians have some level of life risk cover through their superannuation fund for both death and total and permanent disability (TPD) and, to a lesser extent, income protection, but underinsurance is rife. 

NMG Consulting’s October 2022 Australia’s Life Underinsurance Gap report, prepared for the Financial Services Council, estimates that one million Australians are underinsured for death/TPD, while 3.4 million are underinsured for income protection. 

This means that, broadly based on community standards and expectations, the amount they are insured for is insufficient to cover the costs that could arise after their death, serious injury or illness. 

The largest gaps occur among people who have greater needs, such as higher debt or more significant dependant requirements, but must rely on default cover.

Default cover limitations

The default life cover provided by most superannuation funds does have its advantages. Premiums are often low, because funds can buy policies in bulk. 

There is also a “set and forget” mentality, because fees are paid directly from your superannuation balance. Tax benefits can result because employer superannuation and salary sacrifice contributions – to a certain limit – are taxed at 15 per cent, which is lower than the marginal tax rate for most people. 

However, life insurance through superannuation also has limitations. 

Superannuation funds typically offer life, TPD and income protection insurance, but exclude trauma insurance, which is designed to cover any costs that arise due to certain serious medical conditions listed in the terms of cover. 

The level of life insurance cover offered by superannuation funds is often lower than with independent policies. Default cover generally also does not consider factors such as age, gender or smoking status. 

Despite its convenience, paying for life insurance through superannuation depletes your retirement savings. If you have two or more superannuation accounts – like about three million Australians – you are likely paying multiple premiums.

Dealing directly with an insurer

Unlike default cover, life insurance outside superannuation can be tailored by you to suit your specific needs and life stage. 

Providing you pay your premiums, policies can usually be held until the age of 99 – unlike cover through superannuation, which normally ends at age 70. 

Death benefit payouts tend to be quicker, too, because if you are dealing with a superannuation fund, the payout in the event of a successful claim goes first to the trustees of the fund, who must consider whether the payment meets superannuation release conditions. Only then will it be distributed to any dependants.

With life insurance playing such a critical role in safeguarding the financial wellbeing of you or your dependants, weighing up your options now could be essential to ensure you plan appropriately for the future.

NobleOak is a CPA Australia Member Benefits’ Australian life insurance partner and provides special offers to CPA Australia members. Visit our website to get a quote or call one of NobleOak’s friendly team members on 1300 041 494 and mention “CPA”.

This article is a sponsored content piece with NobleOak Life Limited ABN 85 087 648 708 AFSL 247302. This is general advice only – it does not take into consideration your objectives, financial situation or needs. Please consider the PDS, TMD on site. Any comments on tax are not advice.