Most Australians with super have default insurance inside their fund — life cover, TPD, and sometimes income protection. Whether to keep that insurance inside super or replace it with a direct (retail) policy is one of the most important insurance decisions you can make.
The Case for Keeping Insurance in Super
1. Cost-effective access to cover
Group insurance purchased by super funds — covering potentially millions of members — is typically cheaper per unit of cover than individual retail policies. Super funds have negotiating power that individual policyholders don’t.
2. Premiums paid from super, not your pocket
Super insurance premiums are deducted from your super balance — not from your take-home pay. This means you don’t feel the cash-flow impact directly, though your balance grows more slowly.
3. No medical underwriting for default cover
Eligible members receive default cover without health checks or exclusions for pre-existing conditions (subject to the Protecting Your Super rules for inactive accounts). Retail policies require medical underwriting — if you have health issues, super insurance may be the only cover you can access.
4. Tax advantages
Premiums paid from super are effectively funded from pre-tax dollars (SG contributions are pre-tax). TPD and income protection premiums inside super may also be tax-deductible to the fund — indirectly benefiting you.
The Case for Moving Insurance Outside Super
1. Income protection benefit period
Super fund income protection policies typically offer a 2-year benefit period — meaning you receive payments for up to 2 years if you can’t work. Retail income protection policies can offer benefit periods to age 65 — a massive difference if you suffer a serious long-term disability in your 40s.
2. TPD definition — “own occupation” vs “any occupation”
Most super fund TPD policies use the “any occupation” definition — you must be unable to work in any occupation suited to your education and experience. Retail policies (and some super funds like Aware Super, Cbus, UniSuper) offer “own occupation” cover — you only need to be unable to work in your specific occupation.
For professionals (doctors, lawyers, tradespeople), this distinction can mean the difference between a successful or unsuccessful claim.
3. Death benefit distribution — super vs estate
Insurance paid via super is treated as a superannuation death benefit — it goes to your fund’s trustee first, who then distributes it according to your binding death benefit nomination (or at their discretion if no nomination exists). This can delay payments and may result in non-dependants receiving a portion as a taxable lump sum.
Retail life insurance paid outside super goes directly to your estate (via will) or directly to nominated beneficiaries — faster and simpler for estate planning.
4. Protecting Your Super — inactive account risk
The Protecting Your Super legislation (2019) cancels insurance on accounts that have been inactive for 16 consecutive months and have a balance below $6,000. If you change jobs and your old fund becomes inactive, cover can disappear without warning.
When to Review Your Super Insurance
Review your insurance cover whenever:
- Changing jobs — check whether your default cover carries over and whether the new employer’s default fund has equivalent cover
- Consolidating super — rolling funds together cancels cover in the fund you close; check cover in the receiving fund first
- Major life event — marriage, children, mortgage — your cover needs may have increased significantly
- Starting a business or going self-employed — default cover is employer-linked and may not continue
- Health changes — if your health deteriorates, retail underwriting becomes harder; locking in super insurance now may be prudent
Key Comparison: Super vs Retail Insurance
| Feature | Super Insurance | Retail Insurance |
|---|---|---|
| Premium source | Super balance | Personal cash flow |
| Medical underwriting | Usually not for default | Yes — can exclude conditions |
| TPD definition | Usually “any occupation” | “Own occupation” available |
| Income protection benefit period | Usually 2 years | Up to age 65 |
| Death benefit distribution | Via super trustee / BDBN | Directly to estate / beneficiary |
| Inactive account risk | Yes — cover may lapse | No |
| Cost (per unit) | Generally lower (group rates) | Generally higher (individual) |
What Should I Do?
The right answer depends entirely on your circumstances — including your occupation, health, dependants, income, and financial goals. As a general guide:
- Young, healthy, no dependants: Default super insurance is often adequate and the low cost is advantageous
- Professional with significant dependants: Consider supplementing super insurance with own-occupation TPD and longer-term income protection outside super
- Self-employed or irregular employment: Super insurance may not be reliable enough — retail policies provide more certainty
- Someone with pre-existing health conditions: Default super cover (with no underwriting) may be the only accessible option — do not cancel it without ensuring replacement cover is in place
For further reading: Super Insurance — Life and TPD Cover in Super Explained, Binding Death Benefit Nominations Explained, Super When Changing Jobs. For advice on your insurance needs, speak with a licensed financial adviser through MoneySmart.