Understanding insurance in your super

It’s usually offered through your employer’s sponsored super plan as cover they’ve negotiated for you and their other employees (called a group insurance policy) which is generally considered the number one way for Australians to access affordable insurance without needing underwritingⁱ.
 

How insurance in super works

Your insurance premiums get paid out of the money in your super account. This can be good for your budget, because the cost doesn’t reduce your take-home pay, and super is generally taxed at a lower rate than income tax (so you’re saving there too).

But it also means the balance in your super account will be reduced if you don’t keep making super contributions (this is a good thing to keep in mind if you ever take a long-time off work). But you may not want to be too hasty with cancelling your insurance – it can be hard to get the same insurance at the same price later down the track and you may need to answer health and lifestyle questions (known as underwriting).

 

Benefits of insurance inside super

• The costs of insurance premiums come out of your super account, so you won’t be dipping into your take-home pay.

• If premiums are automatically deducted, your insurance may be easier to manage.

• It could be tax-effectiveⁱⁱ because you pay for the insurance from your super contributions instead of your take-home (your take home pay is taxed at your marginal tax rate, which could be a higher rate than what your super is taxed at).

• After joining your employer’s default super plan, you may be able to apply for a higher level of insurance cover within a limited time, without needing to answer health and lifestyle questions.

• Insurance in employer super plans are generally more competitively priced than insurance outside super because it’s provided as group insurance in bulk.

• If a claim is rejected by the insurer, it will go to the trustee of the super fund to be reviewed again.

Considerations for insurance inside super

• Cover through super often ends when you reach a certain age (usually 65 or 70). That’s generally different to cover that’s outside a super account.

• It’s a good idea to make sure your super balance isn’t being reduced more than it needs to be, by your insurance payments. This is called insurance erosionⁱⁱ.

• If you have two accounts with the same type of insurance, you may be paying for insurance you don’t need. In particular, for Temporary Salary Continuance (TSC or Income Protection), you’ll most likely only be able to claim up to 75% of your pre-disability income (offsets may apply), regardless of how much you’re insured for or whether you hold it in two accounts.

• Where insurance benefits are paid to people who aren’t your dependants, they’ll be taxed according to their marginal tax rate.

• Taxes may be applied to Total and Permanent Disablement (TPD) benefits depending on your age.

• Claim payments may take longer, as the money is normally paid by the insurer to the trustee of the super fund before it’s paid to you or your dependants.

Who can get insurance in super?

Well, anyone can apply for insurance in their super if their super account offers it. But there are often benefits available for eligible members in an employer super fund.

For people who sign up to their employer’s super plan, insurance is often provided automatically to eligible members. Eligible members won’t have to answer any questions about their health and lifestyle (known as underwriting questions) which can mean insurance costs more or has specific exclusions based on health or lifestyle factors.

Not everyone is eligible. This is because super laws are there to make sure people want and can afford this insurance. Before the laws were brought in many people didn’t realise they had insurance or that they were paying for it via their super.

To be eligible to receive automatic (default) insurance through your employer super plan you must:

 

• be 25 years old or over,

• have a balance of at least $6,000 in your super account, and

• have had a contribution put into your account within the last 16 months.

In most cases, as soon as you meet these eligibility rules, insurance will be applied automatically.

On the flip side, if you want insurance in your employer plan but are not eligible yet, you may be given a window of time to opt in for insurance when you start your job.

Speak to us to ensure you have adequate insurance cover for your needs.

©AWM Services Pty Ltd. First published Jun 2021 

i ‘Fiscal Impacts of Removing Insurance in Superannuation' Rice Warner 2018

ii An inactive account is a super account that has not received any contributions or rollovers for 16 months. Learn more at https://www.amp.com.au/insights/grow-my-wealth/protect-your-super-package