Insurance inside super — the $7 billion nobody checks

Three types of cover

• Death (life insurance): lump sum paid to your beneficiaries if you die
• Total and Permanent Disability (TPD): lump sum if you can never work again (varies by definition — “own occupation” vs “any occupation”)
• Income protection (salary continuance): monthly payments (typically 75% of salary) if you’re unable to work due to illness or injury, usually for 2 years

Why it’s in super

Premiums are paid from your super balance — meaning from pre-tax money, at group rates. The downside: every dollar of premium is a dollar not compounding in your retirement savings. The insurance cover itself becomes more expensive as you age, often eating heavily into low balances.

The default cover trap

Default insurance in super is calibrated for a “typical” member of the fund. Problems arise when:

• You don’t need it. No dependents, no mortgage — but still paying $600/year in premiums.
• You’re underinsured. A family with two kids and a $700k mortgage may need $1M+ of cover; default is often $100–300k.
• The definitions don’t fit. TPD under “any occupation” is a high bar — you must be unable to do any job, not just your own.
• You’re paying twice. Many people accumulate insurance across multiple super funds.

The “Putting Members’ Interests First” rules

Since 2019, most super funds don’t auto-assign insurance until you’re at least 25, have $6,000 in the account, and have made a contribution in the last 16 months. This stopped the scandal of 19-year-olds paying for insurance they never knew about.

The switching fund trap

When you roll over to a new super fund, your insurance with the old fund stops. The new fund will assign its own default (if you qualify) but:

• Pre-existing medical conditions may not be covered
• Default cover amounts may be lower
• You may need to pass medical underwriting to get equivalent cover

If you’re consolidating funds, check your existing cover before the rollover. If you’ve had a health change since getting the cover, it may be worth keeping the old fund open just for the insurance.

Tax treatment of benefits

When insurance inside super is great

• You have dependents and/or a mortgage
• Cashflow is tight so “painless” premium from super matters
• You have pre-existing conditions that would make retail cover expensive
• The fund’s group rates are genuinely competitive

When to hold it outside super

• You want “own occupation” TPD (rarely available inside super)
• You need cover longer than super allows (most funds cut off income protection at 65)
• You want premiums tax-deductible against personal income (income protection only)