Life insurance through super: A definitive guide

Nobody likes to think about their death, but it’s important to consider what would happen to your family and financial dependents if you pass away. 

Having good insurance cover in place can make a big difference to their future lifestyle if the worst happens. Otherwise, your family may struggle to pay off your debts or to continue enjoying their current standard of living.

An easy way to organise this protection is by holding life insurance (or death cover) through your super, as most funds offer insurance as part of the suite of benefits they provide to their members. To make things even easier, your regular premiums are paid directly from your super account balance.

So what are the basics you need to know about life insurance inside super?

What is life insurance (or death cover)?

Life (or term life) insurance is usually referred to as death cover by super funds.

The primary aim of death cover is to provide financial assistance to your dependents when you pass away, although some policies also pay out if you are diagnosed with a terminal illness.

With death cover, the super fund pays a lump sum or income stream to your nominated beneficiaries on your death. If you don’t nominate a beneficiary, the super fund trustee decides who will receive your death benefit.

In many super funds, death cover is automatically included when you join and is usually referred to as default cover. Many funds bundle it with TPD (Total and Permanent Disability) and income protection insurance.

Under the rules of the Protecting Your Super/Putting Members’ Interests First legislation, super funds are required to get members aged under 25 to formally ‘opt in’ if they wish to receive default life insurance.

Premiums: The cost of death cover in super

Insurance premiums are the amount you pay for the level of cover you have.

The cost of death cover inside super varies based on a variety of factors including the amount of cover you want, your personal situation and the way your super fund calculates its premiums.

Premiums for death cover inside super tend to increase with your age, making it cheapest for young fund members, as statistically their risk of death tends to be lower. However, many funds reduce the level of death cover available for older members, so your premiums may actually start to go down again after peaking in mid-life.

The average premium costs for death cover inside super depend on your age, gender, smoking status, occupation and the level of cover you hold. There is a significant difference between the cheapest and most expensive cover, so it’s worth checking out the premiums in other super funds.

Super funds usually base their premiums on either unitised or fixed cover:

• Unitised cover is where the cost of each unit of cover stays the same over time, but the amount of cover you get for each unit reduces as you get older. With unitised cover there is a risk you could be underinsured as you age.
• Fixed cover increases in cost over time, but the insurance level stays the same until you reach a specific age set by the fund.

Check which super funds have the lowest premiums for life and TPD insurance.

How much death cover can I apply for?

Generally, the default death cover offered by most super funds only provides a basic level of protection. This level of cover may not be sufficient to cover all your financial needs, particularly if you have a big mortgage or high levels of debt.

If you have a young family, you may need more protection than the default cover. Some financial advisers believe a young family with a large mortgage living in a capital city in Australia would need at least $1 million to cover their financial commitments in the event the main income-earner dies.

According to the 2022 report Australia’s Life Underinsurance Gap, one million Australians are underinsured when it comes to their death and TPD needs. The report estimated a 30-year-old with a spouse and earning $65,000 would need $374,000 in death and TPD cover. A 40-year-old earning $110,000 with a spouse and child and debts totalling $400,000 was estimated to need much more cover; around $1,050,000 in death and TPD insurance. These figures were calculated based on normal community expectations of adequate protection and were not considered particularly generous.

Although some super funds – particularly retail funds – allow members to apply for up to $5 million in death cover, higher levels of cover are not automatically available. As the level of cover increases, insurers apply more stringent risk assessments to an insurance application, meaning you will need to supply health information and undertake a medical assessment. Your premiums will also be higher.

If you work in what insurers classify as high-risk occupations – such as a blue-collar worker in a hazardous environment – higher levels of cover can be more difficult and expensive to obtain.

How much death cover do I need?

An adequate amount of life insurance depends on lots of different factors, such as your health and medical history, income level, financial commitments and number of dependents. A healthy single person earning a high income may need less death cover than a person with a partner, young family and a large mortgage. 

It’s worth remembering if you don’t have a partner or people depending on you financially, you may not need life cover.

As death cover is designed to provide financial protection to your dependents when you pass away, the best way to work out how much cover you need is to calculate how much your dependents will need to pay off your debts and continue their current lifestyle.

Expenses to consider include:

• Debts – Include mortgages on your home and any investment or holiday properties, credit card debts, car repayments and any outstanding loans, including personal and business debts.
• Living costs – Calculate your family’s normal expenses for food, clothing, travel, holidays and petrol.
• Regular expenses – Include your regular household expenses, utility bills, medical and home insurance, school fees and childcare costs.
• Funeral expenses – Estimate the cost of your funeral and any legal costs associated with your death.
• Housekeeper and maintenance costs – Estimate how much it would cost to perform the unpaid duties you undertake, such as home maintenance, gardening, cleaning and child minding.
• Future income for a non-working partner – Consider the income your partner would need in the future and whether they would need to return to work.

How long does payment take?

The waiting period between your death and when your beneficiaries receive the insurance payout from your super fund varies but is usually around one to two months with a straightforward claim.

Most super funds require a copy of the death certificate and most recent Will before they will pay your beneficiaries.

If there is a valid and binding death benefit nomination in place, your super account balance and insurance proceeds will be paid out in the form of a super death benefit.

If there is no valid binding beneficiary nomination in place, payment of your death benefit can be more complicated, as this means the fund trustee has discretion over who receives your insurance benefit.

To avoid delaying payment of your death benefit, ensure you have lodged a valid binding death benefit nomination with your super fund. It’s also sensible to regularly review this nomination, particularly when your personal circumstances change and your children leave home.

Tax and your death benefit

If you pass away, the payment from your death cover will generally not be taxed if it’s paid to your partner or a dependent. But tax is payable if the death benefit is paid to a non-financial dependent, such as your adult children.

Next steps: Your death cover checklist

To decide what death cover strategy inside super works for you, here’s a quick checklist of issues to think about:

• Calculate how much death cover your family would need to fund their current lifestyle if you died.
• Remember, even if you’re young you may need death cover so your family has enough money to pay your outstanding debts (such as home mortgage or business debts) if you die.
• Opting out of your fund’s default cover may save money now but could be a false economy if you have a partner or work in a high risk occupation.
• Check to see if your fund allows you to increase or decrease your cover if specific life events occur (such as divorce, remarriage or an addition to the family).
• Talk to your super fund or an independent financial adviser for personal advice on how much death cover you require given your personal circumstances.
• Check the maximum amount of cover you can apply for with your current super fund.
• If your default cover is inadequate, get a quote from your fund for the premium cost for a higher level of protection.
• Consider whether you are prepared to provide health information or undertake a medical examination to obtain a higher level of cover.
• Compare the death cover provided by other super funds, as some funds offer higher cover and more flexible policy options.
• Investigate the level of death cover available through insurance outside super.
• Weigh up the option of having another policy outside super if you need significant insurance protection for your family.
• Never cancel your existing insurance until you have new cover in place, or you risk being left without insurance protection.