Superannuation isn’t just about saving for retirement—it can also be a powerful tool for securing life, disability, and income protection insurance. Holding insurance within super can provide tax benefits, cost-effective premiums, and improved cash flow management. However, it also comes with some limitations that need to be carefully considered.
Here’s everything you need to know about superannuation and insurance to ensure your financial future is well protected.
Why Hold Insurance in Super?
Insurance within super can be a cost-effective and tax-efficient way to manage your protection needs. Here are some key benefits:
- Tax Advantages – Super contributions used to pay for insurance premiums may be tax-deductible to the super fund, reducing overall costs.
- Cash Flow Flexibility – Premiums can be paid from your existing super balance rather than from your personal cash flow.
- Employer Contributions Can Cover Costs – Superannuation guarantee (SG) contributions from your employer may help cover insurance premiums.
- Automatic Underwriting – Some super funds offer default group insurance, which may not require medical assessments—useful if you have pre-existing conditions.
- Potential for Cheaper Premiums – Super funds can negotiate group rates, reducing costs compared to standalone policies.
Types of Insurance Available in Super
1. Life Insurance (Death Cover)
- Pays a lump sum or income stream to your beneficiaries if you pass away.
- Can be tax-effective but may be subject to tax if paid to a non-dependant.
- Funds must meet Superannuation Industry (Supervision) Act 1993 (SIS Act) conditions to release benefits.
2. Total and Permanent Disability (TPD) Insurance
- Provides a lump sum if you suffer a permanent disability that prevents you from working.
- Most policies in super cover ‘any occupation’ rather than ‘own occupation,’ which can make claims harder.
- Some TPD payouts may be taxable, reducing the final benefit amount.
3. Income Protection Insurance
- Pays a portion of your income (usually up to 75%) if you are unable to work due to illness or injury.
- Benefits are taxed as income, reducing the net payout.
- Policy definitions and claim terms are more restrictive within super compared to retail policies.
How to Fund Insurance Premiums in Super
Superannuation insurance premiums can be paid in several ways:
- Pre-Tax Contributions – Salary sacrifice or personal deductible contributions can be used to pay premiums.
- After-Tax Contributions – Personal contributions may qualify for a government co-contribution.
- Spouse Contributions & Splitting – A spouse can contribute to cover insurance costs.
- Accumulated Super Balance – Premiums can be deducted from your existing super balance, reducing retirement savings over time.
Potential Drawbacks of Insurance in Super
While insurance in super has its advantages, there are some important limitations to consider:
- Reduced Retirement Savings – Premiums reduce your super balance over time, affecting long-term growth.
- Limited Coverage & Definitions – Policies within super often have stricter definitions, making it harder to claim.
- Tax on Payouts – TPD and death benefits paid to non-dependants may incur significant tax.
- Delays in Accessing Benefits – Super trustees must approve claims before funds can be released.
- Restrictions on Trauma Insurance – Trauma (critical illness) cover cannot be held in super after July 2014.
When Insurance in Super May Not Be Suitable
You may need a retail insurance policy outside of super if:
- You need higher coverage levels than your super fund offers.
- You prefer ‘own occupation’ TPD cover, which is not available in super.
- You want faster payouts and fewer restrictions on claims.
- You plan to leave death benefits to non-dependants, as tax may reduce the final amount.
Making the Right Choice for Your Situation
Holding insurance in super can be a smart financial strategy, but it’s important to assess whether the benefits outweigh the limitations for your specific needs.
Key Takeaways:
- Super-based insurance can be cost-effective and tax-efficient.
- Be aware of policy restrictions, tax implications, and claim conditions.
- Ensure you review your cover regularly to keep up with life changes.
Need help optimising your superannuation and insurance strategy? Get in touch today to ensure you’re protected in the best possible way.