Should you get insurance inside or outside super?

Life insurance isn’t compulsory with superannuation. The question of insuring within or outside a super fund, or a mix of both, is one with no right or wrong answer. It will depend on your personal needs, and even when you make your choice, this shouldn’t be a set-and-forget decision.

With each life stage and major event – marriage, childbirth, mortgage, pay rise – comes different responsibilities, so you should consider scheduling an insurance review every now and again.

Here’s what you should consider when making a choice to get insurance through super.

What level of insurance cover do you need?

Automatic default cover, Lifestage default, is provided to eligible members and includes a level of Death and Total and Permanent Disablement (TPD) cover based on your age and changes as you move into each new age bracket. Lifestage default cover is automatically provided when you reach age 25 and have an account balance of $6,000.

However, the Lifestage default cover provided may be different to what you require and won’t be tailored to your circumstances. You can change the level of Lifestage default cover by halving or doubling the cover amount.

If you need more flexibility and the ability to tailor your insurance to suit your personal circumstances and financial situation, you may be able to apply for Tailored cover. Tailored cover is a fixed amount of cover which can include Death cover, Total and Permanent Disablement (TPD) cover or Salary Continuance Insurance (SCI) cover.

Find out more about the types of insurance cover available in Essential Super

There are many tools and sources of information you can use. Moneysmart has a good summary on how life insurance works, while the life insurance calculator can help figure out: 

• If you need cover 
• How much cover you might need

Are you an Essential Super customer? Learn about the different types of insurance cover included

How do the costs and tax benefits affect you?

When you have insurance in super, the premiums are paid from your super balance, which is taxed at 15%. For many fund members, this may be a tax effective strategy as this is lower than their marginal tax rate. This also means you don’t have to pay premiums from your own pocket. It is important however to check how much you’re paying in insurance administration fees and be aware that having insurance in super will reduce your super balance.

In contrast, any life and TPD insurance premiums you pay for outside super are generally not tax deductible and you would be effectively paying for these premiums using after-tax money.

How quickly do you need a pay out?

It could take longer to receive a payment if you or a beneficiary make a claim because the insurer needs to pay the super fund and then pay into your super account. You may want to use ASIC’s life insurance claims comparison tool to see how different life insurance providers accept and handle claims and how soon they pay them out.

What else should I consider?

If your super account doesn’t receive a contribution within a period of 16 months, you will need to indicate to your super fund that you would like to continue to be covered. If you don’t provide this confirmation, your insurance will be cancelled by the super fund as required by law.

Explore other frequently asked questions about super.

Need advice on your protection needs? A qualified financial advisor can help.