Super Insurance — Life Cover, TPD and Income Protection Explained

By Peakifi Editorial Team · Updated

This article provides general information only and does not constitute financial advice. For advice tailored to your situation, consult a licensed financial adviser. Learn more.

Contents

Most Australians with an industry or retail super fund hold some form of insurance through their super account. This default cover is automatically applied when you join a fund, without requiring medical underwriting in most cases. For many members, super insurance is the only life insurance they hold.

Understanding what cover you have, what it costs, and whether it’s appropriate for your situation is an important financial review that most Australians skip.

The Three Types of Super Insurance

Life (Death) Cover

Life cover pays a lump sum benefit to your nominated beneficiaries if you die. In super, this is sometimes called “death cover.”

The default death cover amount varies by fund and age — many funds start new members at between $100,000 and $400,000. Some funds use age-based or salary-linked formulas. You can typically increase or decrease cover (subject to any medical underwriting required for increases above the default).

Key considerations:

  • Do you have dependants (partner, children) who rely on your income? If so, death cover is highly relevant.
  • Is the default amount sufficient? A $200,000 payout may sound substantial but replace only a few years of income.
  • Is the premium eroding your super balance? Death cover premiums deduct from your super account monthly.

Total and Permanent Disability (TPD) Cover

TPD cover pays a lump sum if you become totally and permanently disabled and are unable to work again. Most super funds offer TPD as a default, often bundled with death cover.

“Any occupation” vs “own occupation”: Super fund TPD policies typically use an “any occupation” definition — meaning you must be unable to work in any occupation for which you are reasonably suited by education, training, or experience. This is a stricter definition than “own occupation” (unable to perform your specific job). Retail super and standalone TPD policies outside super may offer own occupation definitions for additional cost.

Income Protection Insurance

Income protection (IP) pays a regular benefit — typically 75% of your pre-disability income — if you’re unable to work due to illness or injury. Unlike death and TPD which pay lump sums, IP replaces income over a defined period.

Benefit period: Super fund income protection policies commonly have benefit periods of 2 years or to age 65. A 2-year benefit period may be insufficient for serious illness or injury that prevents work long-term.

Waiting period: The waiting period before benefits start is typically 30, 60, or 90 days. A longer waiting period means lower premiums, but you need to fund the gap between stopping work and benefits starting — which is where emergency funds matter.

Not all super funds automatically include income protection. Some offer it as an optional add-on.

Default Insurance: The Protecting Your Super Reforms

The 2019 Protecting Your Super reforms changed the default insurance landscape significantly:

  • Super funds can no longer automatically apply insurance to accounts with balances below $6,000
  • Super accounts that are inactive (no contributions received) for 16 consecutive months automatically lose their insurance unless the member opts in
  • Members aged under 25 no longer receive automatic insurance on new accounts unless they opt in

These reforms were designed to stop insurance premiums eroding small balances — but they mean younger Australians and those who’ve had a gap in employment may find they have no cover without actively opting in.

The Cost of Super Insurance

Super insurance premiums are deducted from your super account balance, typically monthly. This is convenient — you don’t pay out of pocket — but it does reduce your retirement savings over time.

A rough illustration: a 35-year-old male with death and TPD cover of $400,000 might pay $25–$60/month in premiums depending on the fund. Over 30 years, that premium (even without compounding effects) represents $9,000–$21,600 in direct deductions from the super balance that would otherwise compound.

This doesn’t mean insurance is bad — it means the cost-benefit calculation should be considered explicitly, not ignored.

Is Your Default Cover Appropriate?

Default cover is designed for an “average” member — but your needs may differ significantly. Ask yourself:

  • Do you have dependants? If not, death cover may be less critical.
  • Does your employer provide income protection? Some employers provide group IP, which may reduce the need for super IP.
  • Do you have existing standalone policies? If you have retail life and TPD outside super, duplicating in super is unnecessary cost.
  • Is the default amount sufficient? A financial adviser can calculate the cover needed to replace your income and pay off your debts.
  • What is the fund’s claims history? Some funds have better track records than others at paying TPD claims without excessive disputation.

Tax and Super Insurance

Premiums: When insurance is held inside super, premiums are paid from pre-tax super funds at 15% tax — meaning the effective cost is lower than paying premiums from after-tax income (where you’d need to earn more gross income to cover the same premium cost).

Benefit payments: Death benefits paid to tax dependants (spouse, children under 18, financially dependent adults) are tax-free. Benefits paid to non-dependants (adult children, siblings) may include a taxable component taxed at 15% plus Medicare levy.

TPD and income protection payments paid through super have specific tax treatment depending on whether you’re under or over preservation age and whether the fund has claimed a deduction on the premiums.

Frequently Asked Questions

Can I increase my super insurance without a medical exam? Most funds allow you to apply for additional cover, though amounts above the default or previous cover level typically require underwriting — answering health questions and potentially a medical examination. Some funds offer “life events” increases (e.g., getting married, having a child) without underwriting up to specified limits.

What happens to my super insurance if I change jobs? The 2019 stapling reforms mean your super account (and its insurance) follows you when you change jobs, rather than your new employer defaulting you into their fund. However, you should check whether contributions to your existing fund from the new employer are possible, and review whether the insurance on your existing fund is still appropriate.

Should I cancel my super insurance? Only with careful consideration. If you’re young, have no dependants, and have a small super balance where premiums are material, opting out can preserve more super for compounding. If you have dependants or a mortgage, insurance is likely valuable — the question is whether the default amount and terms are appropriate.

Guides in This Section

For advice tailored to your insurance needs, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.

Tax Treatment of Super Insurance Premiums and Claims

Premiums: Life and TPD premiums paid from your super fund are paid from pre-tax super money — effectively tax-effective compared to paying premiums from your after-tax income.

IP premium tax: Income protection premiums are tax-deductible if paid personally (outside super). Inside super, they’re deducted from the super balance rather than being personally deductible — the tax treatment differs and depends on your situation.

Claims — Life insurance: Death benefits paid from super are tax-free to tax dependants (spouse, children under 18) and taxed at 17% (including Medicare levy) if paid to non-dependants (adult children, siblings) via the estate.

Claims — TPD: TPD benefits paid from super are split into a tax-free component (for work incapacity) and a potentially taxable component if you’re under 60. The ATO provides specific calculations for the taxable proportion.

Claims — Income protection: IP benefits paid from super are generally taxed as ordinary income in the year received, at your marginal rate. Unlike IP outside super, there is no offset for the tax already paid in the fund.

Reviewing Insurance Needs at Life Stage Changes

Super fund default cover is designed for a general population and may not reflect your actual needs. Key life events that trigger an insurance review:

  • Buying a home: Mortgage debt increases the financial impact of death or disability — more cover may be warranted
  • Starting a family: Dependent children increase the income replacement need
  • Paying off mortgage: Reduced financial obligations may mean less cover is needed
  • Approaching retirement: Near-retirees with substantial super and no dependants may need little or no life insurance

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