How to improve life insurance through Super
According to Australian financial regulatory body the Australian Securities and Investments Commission (ASIC), as of 2021, approximately 10 million Australians had “default” life insurance through Super.
Whilst most Australians understand that they have Super, estimates are that only about half understand that they are paying for default life cover through their Super.
Even fewer understand the cover and benefits they are paying for.
Whilst default life cover through Super has helped reduce life insurance underinsurance in Australia (2016 underinsurance estimate: $471bn) and the scheme is regarded as a community good, for most, their default life insurance coverage is woefully inadequate.
Moreover, the benefits of default life insurance through Super are limited compared to retail policies. Many Australians would not consider life insurance outside of Super, though this does not mean improvements cannot and should not be made to individual default policies.
Unfortunately, Australians often only realise the shortfalls and limitations when making a claim.
Here is how Australians can improve their default life insurance through Super.
1. Becoming aware and knowledgeable
A 2019 study estimated that a third of Australians rarely or never open correspondence from their Super fund.
ASIC has estimated that half of all Australians with life insurance through Super are unaware they have it, and this is a problem.
The first step to improving default life cover is becoming aware that it exists and becoming knowledgeable about the coverage, configuration, costs and limitations.
2. Improving coverage
For family in their 30s with children, life insurance coverage should be approximately 11x annual earnings.
With default life insurance, it is typically closer to 2x.
Underinsurance is even more pronounced for income protection and TPD cover.
Whilst there are generally limits to the coverage that can be provided through life insurance through Super, for most Australians, those limits are not an issue.
Making a change in coverage is usually fast and straightforward and doing so would be a significant improvement for most Australians.
3. Life insurance through Super is not always cheaper
Super funds buy “group” policies from life insurance companies.
These policies are blanket policies protecting the large cohorts of Super fund members (e.g., blue-collar workers, and white-collar workers).
Because these group policies have to cover so many people and scenarios, they do not offer the benefit of individual customisation.
This means that a young, non-smoker’s policy premiums are subsidising older smokers with the same, identical policy. Research consistently shows that life insurance premiums through Super are not always cheaper than a retail policy.
Premiums can erode retirement savings
In certain circumstances, life insurance premiums paid through Super can unacceptably erode retirement savings over the long-term.
Steps have been taken to mitigate this, though it is worth understanding where a policyholder’s retirement savings would be if paid outside of Superannuation.
There are ways this can be mitigated though relatively few do so.
Payouts can be taxed up-to 32%
Payouts from retail life insurance policies are tax free in Australia.
Depending on the configuration of default life insurance through Super, payouts can be taxed up-to 32%.
Policies are “variable age stepped”
As of December 31 2024, default life insurance policies are “variable age stepped”. (Before this, policies were “stepped”).
Under this scenario, premiums automatically increase at certain age intervals rather than annually.
Whilst this can provide predictability and more extended periods of premium stability, the downsides are higher initial premiums (the insurer averages out the risk over the step period) and more significant premium increases.
Outside of Super, you can opt for “level” policies, which have premiums that do not increase over the policy's life.
Income protection is not tax deductible
Income protection premiums through Super are not tax deductible.
Outside of Super, they are.
4. There are inherent limitations to life insurance through Super
Whilst fixing the issue of coverage and underinsurance goes some way to improving default life insurance through Super, the inherent limitations of the product can cause problems.
You may or may not be able to do things to improve things, though knowing the limitations is a good first step.
Policies can change at any time
When you have life insurance through Super, your relationship isn’t with the insurer; instead, the relationship is between the insurer and the Super trustees.
This means that life insurance policies can be changed at any time and change they do.
And rarely in favour of policyholders.
The move from “stepped” to “variable aged stepped” policies is another example of an arbitrary change, albeit one that was mandated by the government.
The claims process is slower
To make a claim, policyholders go through their Super fund, which talks with the insurer. This double-handling adds time which means typically slower life insurance claims than outside Super.
ASIC’s recent action against a significant Super fund for an unacceptably slow claims process also highlights that Superannuation funds are generally poor at claims management.
Moving insurance between Super funds might not be doable
Moving your life insurance policy may be impossible if you switch Super funds.
The choice of beneficiaries is limited; and payout is at the discretion of the Super trustees
Choosing who receives a payout in the event of death is understandably essential to a life insurance policyholder
Through Super, beneficiary nomination is limited.
For instance, you cannot nominate a charity. And if you nominate someone who is not financially dependent, the payout will (likely) be taxed.
Moreover, all payouts are at the discretion of the Super trustees, which can both delay things and cause disputes.
Policies expire earlier
Life insurance through Super ends between 65 - 70.
With policies outside Super, as long as you pay your premiums, you’re covered to the extent of the policy.
The definition of TPD is much tougher
With life insurance through Super, the definition of TPD is “any occupation” which means that as long as you can do some work - whatever that is - TPD isn’t payable.
Outside of Super, you can get “own occupation” TPD, which means that if you can’t do your job, TPD is payable.
Income protection is potentially less and for less time
When assessing your income protection needs, Super funds look at your earnings for the past 12 months rather than averaging it out over a longer term.
This means that if you took time off or were looking for employment for a period in the previous year, your income protection payments could be insufficient.
Moreover, income protection payments through Super last only two years, meaning that after that period, you’re on your own.
And, if you also receive a TPD payment through Super, the income protection stops.
You may not be covered for pre-existing conditions
Although there is no requirement to nominate pre-existing conditions with life insurance through Super, some policies will deny payout for up to five years if you have them.
Many policyholders would be unaware of this until they made a claim.
Your life insurance will lapse if you stop making contributions
If you took time off to have a baby or travel (as two examples) and stopped making contributions, your policy will lapse after 16 months.
Where you consider that a third of Australians rarely or never read correspondence from their Super fund and that this is an opt-out feature of the product, it comes as a shock to many to find that they no longer have cover.
Trauma protection is no longer covered
Unless you were in a Super fund that offered trauma protection prior to 2014, trauma protection is no longer covered or an option.
You might not be covered at all
If you’re under 25, you’re not covered unless you specificaly opt-in.
And except in certain circumstances, this includes if you work in a dangerous occupation.
5. A retail policy still paid through Superannuation
For many, paying for life insurance through Super is the best way.
And there is nothing wrong with that.
Australians can assess a suitable retail life insurance policy through a life insurance broker or financial planner and still nominate to pay for life insurance through Super.
There are even online life insurance brokerswho specialise in helping Australians optimise life insurance still paid through Super.
Better still, through “super linking,” you can separate income protection, TPD, and trauma and pay for these directly, meaning you get the full benefits of these products while still paying for life insurance through Super.
Conclusion
Life insurance through Super has been a great innovation, and many more Australians have life cover than would otherwise have been the case.
Underinsurance is a consistent issue, and even when they are aware that they have life insurance through Super, many Australians assume the configuration and coverage of their policy will be sufficient.
Increasing your coverage of your default life insurance should be straightforward. You can potentially go further with a retail policy still paid through Super.
It’s worth having a look.
