For Australians, life insurance and superannuation is not only a way to save for retirement, but it also often includes life insurance. Understanding how life insurance within your super works, its advantages, limitations, and how it fits into your overall financial strategy is key to making informed decisions. This comprehensive guide will cover everything you need to know about life insurance in superannuation, provide answers to common questions, and help you determine whether you need to adjust your cover or explore additional options outside your super fund.
What Is Life Insurance Through Superannuation in Australia?
Life insurance in superannuation typically includes three types of cover:
- Life Cover (often referred to as Death Cover): This pays a lump sum to your beneficiaries if you pass away or are diagnosed with a terminal illness.
- Total and Permanent Disability (TPD) Insurance: This provides a lump sum if you become permanently disabled and are unable to work again.
- Income Protection Insurance: This covers a percentage of your income if you are unable to work due to illness or injury for a set period.
These covers are often automatically provided by super funds to help protect members and their families from financial hardships in case of death, disability, or income loss.
Do I Need Both Life Insurance and Income Protection?
It’s important to understand that life insurance and income protection serve different needs. Life insurance covers long-term risks such as death and terminal illness, while income protection provides a safety net if you’re temporarily unable to work due to illness or injury.
If you are the primary breadwinner or have significant financial responsibilities, both types of cover may be essential to protect your loved ones from potential financial ruin. However, your needs will depend on your personal situation, including your family structure, financial obligations, and existing safety nets.
Does Life Insurance Cover Income Protection?
Life insurance and income protection are distinct products. Life insurance pays a lump sum upon death or terminal illness, while income protection replaces a portion of your income if you’re unable to work for a temporary period due to injury or illness.
Many people mistakenly assume life insurance will provide income protection, but they serve different purposes. If you’re looking for a comprehensive protection plan, it’s worth considering having both types of cover. A tailored solution will ensure that all your needs are addressed—whether that’s the need for long-term protection or covering day-to-day expenses during recovery.
What Income Protection Doesn’t Cover in Australia?
While income protection insurance is crucial for safeguarding your income, it doesn’t cover everything. Most policies won’t provide benefits for:
- Pre-existing conditions not disclosed at the time of application
- Illnesses or injuries caused by high-risk activities such as extreme sports (unless specifically covered)
- Time off work not related to illness or injury (e.g., maternity leave)
Additionally, superannuation-based income protection policies are generally limited in terms of the benefit period, often offering coverage for only two years. This may not provide long-term financial security in cases of severe illness or injury.
Is Income Protection Insurance Paid on Death?
No, income protection insurance is designed to replace your income if you’re temporarily unable to work due to illness or injury. For this reason, income protection cannot substitute for life insurance. A balanced risk protection strategy will include both types of cover to ensure your family is protected in all scenarios.
Insurance in Superannuation vs. Retail Life Insurance: Which Is Better?
One common question people have is whether they should stick with the default insurance offered through their super or take out a retail policy. Both options have their pros and cons:
Life Insurance Through Superannuation
- Automatic cover: Most super funds automatically provide life and TPD insurance without the need for medical exams.
- Cheaper premiums: Premiums generally seem cheaper because they’re paid out of your super balance, but this reduces the amount you’ll have in retirement.
- Simplified cover: Often, the cover is more basic and may not be tailored to your specific needs. For example, TPD definitions in super policies tend to be stricter, making it harder to make a claim.
Retail Life Insurance
- Customised cover: Retail life insurance can be tailored to your needs, offering more flexibility with the level of cover, waiting periods, and additional features like trauma cover.
- Premium payment: You pay premiums directly from your bank account, meaning your retirement savings aren’t affected.
- Medical examinations: Most retail policies require a health check, but this can work to your advantage if you’re in good health, as it may lower premiums.
- Distribution of Benefits: Unlike life insurance inside super, the proceeds of a claim go directly to the policy owner or beneficiary. When the policies are owned by the superfund, the proceeds may be held up as they are distributed at the discretion of the trustees.
The right choice for you will depend on your personal circumstances. If you’re uncertain about the level of cover you need, speaking with an adviser can help you tailor a solution.
Advantages of Life Insurance through Superannuation
There are several advantages to having life insurance in your super fund:
- Cost-effective: Premiums are deducted from your super balance, which can be tax-effective since contributions to super are taxed at a lower rate than personal income. Additionally, this will not impact your cashflow.
- Automatic cover: No need to apply or undergo medical exams for basic cover.
- Group pricing: Super funds often negotiate lower premiums for their members, making it a cost-effective option.
Disadvantages of Life insurance Inside your Super
While convenient, life insurance through super also has some downsides:
- Limited cover: The automatic cover provided may not be enough to fully protect your family or assets. For example, the average life insurance payout in super may not be enough to cover your mortgage and other long-term financial obligations.
- Tax on payouts: In some cases, your beneficiaries may be taxed on the life insurance payout, especially if they are not considered dependents under superannuation law.
- Restricted benefit periods for income protection: As mentioned earlier, super-based income protection policies often limit benefits to two years, which may not be sufficient if you’re dealing with a long-term illness or injury.
Tailoring Your Insurance for Comprehensive Risk Management
The best approach to protecting your financial future is to create a comprehensive risk insurance solution that includes both life insurance and income protection. A personalised plan allows you to balance affordability with adequate cover, ensuring that all aspects of your financial risk are addressed.
- Assess your needs: Start by evaluating your financial responsibilities, including debts, dependents, and future goals (e.g., your children’s education or maintaining your family’s lifestyle).
- Consider your income: Think about how long you could manage financially if you were unable to work. This will help you determine how much income protection you need.
- Evaluate your current super cover: Review the default cover provided by your super fund. If it’s insufficient, you can often increase your cover through your fund or supplement it with a retail policy.
How Safety Nest Can Help
At Safety Nest, we understand that everyone’s needs are different. That’s why we offer tailored solutions that combine life insurance and income protection, ensuring comprehensive coverage that’s customised to your situation.
Our advisers take the time to understand your financial goals and risk profile, helping you navigate your options. Whether you need more life cover or a longer income protection benefit period, we work with you to ensure your family is protected, no matter what happens.
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Don’t leave your financial future to chance. Work with our team at Safety Nest to create a comprehensive insurance plan that fits your needs. Click the Get Started button below to book a no-obligation consultation with one of our expert advisors today.