Holding insurance inside superannuation preserves cash flow, because premiums come from your balance rather than your bank account, and cover is often issued without full underwriting. The trade-offs are a reduced retirement balance, narrower policy definitions in some funds, and tax on benefits paid to non-dependants.
Most Australians have some insurance inside their superannuation, and a large proportion have never looked at what it covers, what it costs, or who would receive it. It is worth ten minutes, because the differences between holding cover inside super and outside it are real and they are not all in one direction. Silverloom reviews both as part of insurance and risk protection.
What insurance can be held inside super?
Life cover can be held in super. Pays on death, and in most policies on terminal illness.
Total and permanent disability cover can be held in super, with an important qualification covered below.
Income protection can be held in super.
Trauma or critical illness cover generally cannot. A trauma benefit is paid on diagnosis of a specified condition, which does not align with superannuation’s conditions of release. If you want trauma cover, it is held outside super.
That last distinction is the clean one worth remembering: if a benefit does not correspond to a condition of release, super is not where it lives.
What are the advantages of holding cover in super?
Cash flow. Premiums come out of your super balance rather than your take-home pay. For households where the alternative is being underinsured because the premium is unaffordable, this is the decisive advantage.
Cover without full underwriting. Default cover in many funds is issued automatically up to a level, without medical questions. For someone with a health history that makes retail cover expensive or unavailable, default cover in super may be the only cover they can obtain.
Potential tax effectiveness. Where premiums are funded by concessional contributions, the effective cost can be lower than paying from after-tax income. Whether that applies depends on your contributions position and your marginal rate.
Consolidation. One deduction from one balance rather than several policies billed separately, which in practice means fewer policies lapse through missed payments.
What are the drawbacks?
It erodes your retirement balance. Every premium is money not compounding until retirement. Over thirty years that is not a small number, and it is invisible because it never touches your bank account.
Definitions can be narrower. This is the most important drawback and the least understood. TPD cover held inside super must meet a condition of release to be paid out, which generally means the more restrictive “any occupation” test — unable to work in any occupation you are reasonably suited to by education, training or experience. Outside super, an “own occupation” definition may be available, which pays if you cannot work in your specific profession. For a surgeon who can no longer operate but could teach, the difference between those definitions is the entire claim.
Income protection inside super is often more limited. Typically shorter benefit periods and fewer ancillary features than comparable retail policies.
Tax on death benefits to non-dependants. Covered below, and it catches people with adult children.
Claims can take longer. The benefit is paid to the trustee first, who must then determine who receives it. That adds a step, and on death benefits it can add months.
Who receives the payout, and is it taxed?
Two separate questions and both matter.
Who receives it is determined by your death benefit nomination, not by your will. If there is no valid nomination, the trustee decides among eligible beneficiaries. Superannuation law limits who can receive a death benefit to dependants or your legal personal representative.
Whether it is taxed depends on the recipient’s status. Benefits paid to a tax dependant — generally a spouse, a child under 18, or someone financially dependent — are typically tax free. Benefits paid to a non-dependant, which commonly means a financially independent adult child, can be taxed on the taxable component.
That is the outcome that surprises people. A parent with adult children, holding life cover inside super, may be leaving a benefit that is taxed in a way an equivalent policy held outside super would not be. Whether that matters depends on the amounts and the family, but it should be a decision rather than an accident. It is one of the places estate and wealth protection and insurance meet.
Has default cover changed?
Yes, and many people lost cover without registering it.
Under the Protecting Your Super and Putting Members’ Interests First reforms, insurance is no longer provided automatically to members who are under 25, or whose account balance is below a set threshold, unless the member elects to have it. Cover on inactive accounts can also be cancelled.
The intent was sound — stopping young people with small balances paying premiums for cover they did not need. The consequence is that a cohort of Australians assume they have cover through super and do not. If you have not checked in the last few years, check.
How do you work out how much cover you need?
There is no universal multiple of income. The framework most commonly used works through four components:
- Debt. What would need to be cleared — mortgage, personal debt, business obligations.
- Income replacement. How much income would need replacing, for how long, and for whom.
- Specific future costs. Education, care needs, obligations that continue regardless.
- Existing cover and assets. What is already held, inside and outside super, and what assets could be drawn on.
The gap between the first three and the fourth is the shortfall. That is a method rather than a number, and the number it produces differs enormously between households with the same income.
Frequently asked questions
Is life insurance in super tax deductible?
Premiums are generally deductible to the superannuation fund rather than to you personally. The effect on you depends on how the contributions funding those premiums are made and taxed.
Is a superannuation death benefit taxed?
Benefits paid to tax dependants are generally tax free. Benefits paid to non-dependants, such as financially independent adult children, can be taxed on the taxable component of the benefit.
Can I hold trauma insurance inside super?
Generally no. A trauma benefit is paid on diagnosis of a specified condition, which does not meet a superannuation condition of release. Trauma cover is normally held outside super.
What is the difference between own occupation and any occupation TPD?
Own occupation pays if you cannot work in your specific profession. Any occupation pays only if you cannot work in any role you are reasonably suited to. TPD inside super generally uses the any occupation test.
Do I still have default cover in my super?
Not necessarily. Following the Putting Members’ Interests First reforms, cover is not automatic for members under 25 or with low balances unless they have opted in. Check with your fund.
Silverloom Advisory Group reviews insurance held inside and outside superannuation as part of licensed advice delivered online across Australia. It starts with a free 20 to 30 minute phone call, with no obligation to go further. Book a time that suits you, or get in touch if you would rather ask a question first.
General advice warning. This article contains general information only. It does not take into account your objectives, financial situation or needs. Policy definitions, terms and tax treatment vary between insurers and funds; review your own policy documents and obtain personal advice before acting. Silverloom Advisory Group Pty Ltd is a Corporate Authorised Representative (CAR 1310731) of Core Advice Collective Pty Ltd, AFSL 700341.