Default vs Retail vs Direct Life Insurance: Pros, Cons and things to know
In Australia, life insurance is typically through one of three policies:
- Default (or Group) policies (through Super)
- Retail policies
- Direct policies
Some people have their life insurance through their employer, though the big three policy types cover the vast majority of Australians.
While each of these three policies fundamentally provides life insurance coverage, they differ in several important ways.
Understanding the right policy for you and ensuring you have suitable coverage is important to ensure your loved ones are fully and truly looked after if you are no longer around.
Default (Group) Life Insurance (through Super)
Most Australians - 10 million as of 2021 according to ASIC - have life insurance through a default (or group) policy.
Through their Super.
Interestingly, only about half of those insured know they have coverage. And a recent study by AFRM Claims Advocacy found that 80% of Australian families were unaware their loved one had default life insurance at the time of death.
Things you should probably know
- Automatically provided when you join a Super fund (expect in certain age or Super balance circumstances).
- The premiums are deducted from your Super balance and are not out-of-pocket.
- Automatic acceptance (i.e. no questions or medical checks) though some policies may exclude pre-existing conditions for a period (e.g. 5 years).
Positive
- Generally affordable due to the bulk purchase of policies by Super funds.
- Automatic and convenient.
- Immediate coverage (generally).
- Can suit people with pre-existing conditions.
Not as positive
- Default coverage is generally insufficient and by some factor.
- One-size-fits-all coverage may not meet personal circumstances, and you may be subsidising smokers and older policyholders.
- Reduces retirement savings over time.
- Slower claims process.
- Other inherent limitations which can be improved or mitigated. (Recommended read.)
Retail Life Insurance
According to Statista, Australians are “increasingly seeking life insurance products that offer more customisation and flexibility to meet their specific needs”, and that is where retail life insurance comes in.
A retail life insurance policy is one the policyholder opts into, purchased through a financial advisor or insurance broker.
These policies are individually customised and one-to-one: the relationship is between the policyholder and the life insurer. (With default life insurance, the relationship is between the Super fund (trustees) and the life insurer which can lead to lower acceptance rates and claims processing delays).
What you should know
- Can be cheaper or more expensive than default life insurance depending on circumstances.
- Fully underwritten due to policies requiring health and lifestyle assessments (medicals etc).
- Customisable with features such as trauma insurance, which is unavailable through default life insurance.
Upside
- Can mitigate many of the inherent limitations of default life insurance.
- Tailored and customised to individual circumstances.
- Higher cover limits available, though not an issue for many Australians.
- Better accepted claim rates.
Possible downsides
- Can be more expensive due to the personalised nature of the policy.
- The most complex and time-consuming application of all the main policy types.
- Likely requires medical examination and other lifestyle disclosures.
- You may need to pay a financial adviser.
Direct Life Insurance
Direct life insurance is the direct purchase of life insurance directly from an insurer, often online or over the phone.
Often involving “no medicals”, these policies have the advantage of simplified underwriting at application.
This, however, means that these policies can be more expensive than default and retail policies, include more exclusions, and are less tailored by definition.
Direct life insurance policies have less successful claims as a result, partially because there isn’t the support of a financial advisor, insurance broker or Super fund (trustees) in the case of default life insurance.
Moreover, as part of a 2018 broad investigation into life insurance, ASIC found that by design, direct life insurance led to “poor consumer outcomes”.
This has improved somewhat.
Things to know
- Typically purchased directly from the insurer (TV, direct mail, online, phone).
- Simplified or no underwriting: e.g. no medicals, few questions.
- Standardised policies with limited customisation.
Upsides
- Fast and easy to apply, often with instant cover.
- Often, no medicals.
- Could be an option for those unable to obtain retail life insurance.
Downsides
- Expensive for the level of cover provided.
- Greater exclusions can lead to higher denied claim rates.
- Limited customisation.
To summarise
| Feature | Retail | Direct | Default |
|---|---|---|---|
| How to Buy | Through financial advisers/brokers | Directly from insurer (online/phone) | Automatically through super fund |
| Customisation | High – tailored to your needs | Low – standardised products | None – basic cover |
| Underwriting | Full medical and lifestyle checks | Minimal or no underwriting | No medical checks (automatic acceptance) |
| Premium Costs | Moderate to High (for tailored cover) | Moderate to High | Moderate (deducted from super) though not always cheaper |
| Claim Approval | High likelihood (underwritten upfront) | Risk of denial due to exclusions | Possible delays or denials |
| Coverage Amounts | High – flexible limits | Moderate – capped limits | By default, low – basic amounts |
| Application Process | Time-consuming and detailed | Quick and simple | Automatic |
| Exclusions | Fewer exclusions | More exclusions | Basic coverage with potential limits |
| Best For | Comprehensive, long-term needs | Quick, simple cover | Affordable, basic protection |
| Drawbacks | Can be expensive, more complex process | Higher premiums, less cover | May not provide enough cover by default, limitations, may affect super balance |
A few other things to know
Other insurances might be included in your policy and/or you might consider.
Funeral Insurance
Funeral insurance is designed to cover funeral costs and related expenses. The payout is understandably smaller though access to the funds is typically quicker. Funeral insurance is relatively expensive, and some retail policies allow provisions for loved ones to receive a payment towards the funeral before the claim is fully assessed.
Accidental Death Insurance
Accidental Death Insurance covers death if caused by an accident at work. It is a less expensive insurance and might make sense if your occupation could lend itself to an accident at work. It is a relatively cheaper insurance because it doesn’t cover death by natural causes.
Income Protection Insurance
Income Protection Insurance is a standard feature of most default and retail life insurance policies.
The insurance covers your income if you cannot work due to injury or illness. Insurers will take an assessment of your previous income and generally offer around 70% of that as your ongoing payouts from the insurance policy.
Income protection insurance payouts are taxable in Australia, though the premiums are tax-deductible if the policy is held outside of Super.
If you have default life insurance through Super, it is essential to note the possible limitations of income protection offered under your policy, especially compared to what is available through a retail life insurance policy.
Total and Permanent Disability (TPD) Insurance
TPD Insurance is also a standard feature of most default and retail life insurance policies.
TPD Insurance pays a lump sum if you cannot work due to disability.
Depending on the policy you have…
Under default life insurance, the assessment is “any occupation”, meaning that only if the insurer deems you can never work again - in any occupation - do you get a payout. It is also taxed at up to 22%.
And, if you receive a TPD payout under default life insurance, most policies will stop paying income protection insurance.
Under a retail policy, you can opt for “own occupation” meaning that only if you cannot do your previous line of work, the insurer will pay out.
And payouts are generally tax free.
If you have default life cover, check your policy. This is literally for life.
Trauma (Critical Illness) Insurance
Trauma Insurance covers a payout if you are diagnosed with a specified illness like cancer, heart attack or stroke, covering medical costs and living expenses during recovery.
Since 2014, it has not been an option under default life insurance.
Child Life Insurance
Child Life Insurance is sometimes available as an optional add-on to existing retail life insurance policyholders and offers coverage for serious illness and injury, death and funeral cover, TPD and payouts for specified medical conditions. It is an uncommon insurance in Australia and doesn’t cover pre-existing conditions.
Conclusion
When choosing between default (Super), retail, and direct life insurance, the best option depends on your personal needs and financial goals:
- Retail Life Insurance: offers the most comprehensive coverage, higher payout potential, and fewer exclusions, but can come with higher costs and a more complex application process. It’s best suited for those seeking long-term security and tailored protection.
- Direct Life Insurance: provides possibly a good middle ground, offering convenience and quicker approval but often with more exclusions and limited flexibility. It’s ideal for those wanting simple, quick coverage.
- Default (Super) Life Insurance: sometimes the most affordable and accessible, included in most Super funds. However, it can have the lowest coverage, potential tax implications, and limited customisation, making it suitable for those who want basic protection without extra effort.
Ultimately, retail insurance is best for those who prioritise full control and security, direct insurance suits those who want ease and accessibility, and default super insurance is a cost-effective option for those needing minimal coverage (notwithstanding you can change your coverage levels).
