According to Australian financial regulatory body the Australian Securities and Investments Commission (ASIC), as of 2021, approximately 10 million Australians had “defaultˮ life insurance through their Superannuation.

(Superannuation – a term unique to Australia – is a compulsorary retirement

savings scheme paid into by employers, similar to 401ks and Canadaʼs RRSPs.)

Whilst most Australians understand that they have Superannuation, estimates are that only about half understand that they are paying for default life cover through their Superannuation.

Even fewer understand the cover and benefits they are paying for.

Whilst default life cover under Superanniuation has gone some way to reducing 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 Superannuation are limited when compared to retail policies.

Many Australians would not consider life insurance outside of Superannuation, though this does not mean improvements cannot and should not be made to individual default policies.

Unfortunately, it is often only at the time of making a claim that Australians come to realise the shortfalls and limitations.

Here is how Australians can improve their default life insurance under Superannuation.

1. Becoming aware and knowledgable

A 2019 study estimated that a third of Australians rarely or never open correspondence from their Superannuation fund.

With half of Australians with life insurance through Superannuation unaware they have it, 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 under Superannuation, 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 under Super is not always cheaper

Superannuation funds buy “groupˮ policies from life insurance companies. These policies are blanket policies protecting the large cohorts of Superannuation fund members (e.g. blue collar workers, white collar workers).

Because these group policies have to cover so many people and scenarios, they do not come with the benefit of individual customisation. Which means that a young, non-smokerʼs policy premiums are subsidising older, smokers with the same, identical policy.

Research consistently shows that life insurance premiums under Super are not always cheaper than a retail policy.

Premiums can erode retirement savings

In certain circumstances, premiums paid from Superannuation can unacceptably erode retirement savings over the long-term.

Steps have been taken to mitigate this, though it is worth understanding where a policyholderʼs 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 Superannuation, payouts can be taxed up-to 32%.

Policies are “steppedˮ

With a “steppedˮ policy, the premiums increase over time as policyholder becomes older.

This means that at the very time claims are most likely, these policyholders can no longer afford life insurance through Superannuation.

Policies outside of Superannuation can be “levelˮ meaning that they are most affordable as people age and need cover.

Income protection is not tax deductable

Income protection premiums under Superannuation are not tax deductable. Outside of Superannuation, they are.

4. There are inherent limitations to life insurance under Superannuation

Whilst fixing the issue of coverage and underinsurance goes some way to improving default life insurance through Superannuation, the inherent

limitations of the product are where things can become unstuck.

You may or may not be able to do things to improve things; though knowing the limitations is a good first step.

Policies can be changed at any time

When you have life insurance under Super, your relationship isnʼt with the insurer; instead, the relationship is between the insurer and the Superannuation trustees.

This means that policies can be changed at any time and change they do. And rarely in favour of policyholders.

The claims process is slower

To make a claim, policyholders go through their Superannuaion fund who in turn talks with the insurer. This double-handling simply adds time.

Recent action by ASIC against a major Superannuation fund for an

unacceptably slow claims process also highlights that Superannuation funds are generally poor at claims management.

Moving insurance between Superannuation funds might not be doable

It may not be possible to move your insurance policy if you choose to switch Superannuation funds.

The choice of beneficiaries is limited; and payout is at the discretion of the Superannuation trustees

Choosing who receives a payout in the event of death is understandably important to a life insurance policyholder.

Under Superannuation, beneficiary nomination is limited. For instance, you cannot nominate a charity.

And if you nominate someone that is not financially dependent, the payout will (likely) be taxed.

Moreover, all payouts are at the discretion of the Superannuation trustees which can both delay things and cause dispute.

Policies expire earlier

Life insurance under Superannuation ends between 65 – 70.

With policies outside Superannuation, as long as you pay your premiums, youʼre covered to the extent of the policy.

The definition of TPD is much tougher

With life insurance under Superannuation, the definition of TPD is “any occupationˮ which means that as long as you can do some sort of work – whatever that is – TPD isnʼt payable. Outside of Superannuation, you can get “own occupationˮ TPD which means if you canʼt do your job, TPD is payable.

Income protection is potentially less and for less time

When assessing your income protection needs, Superannuation 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 protecton payments could be

insufficient.

Moreover, through Superannuation, income protection payments last for only two years meaning that after that period, youʼre on your own.

And, if you also receive a TPD payment through Superannuation, the income protection stops.

You may not be covered for pre-existing conditions

Despite there being no requirement to nominate pre-existing conditions with life insurance under Superannuation, some policies will deny payout for up-to five years where you have pre-existing conditions.

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 Superannuation 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 Superannuation fund prior to 2014 that offered trauma protection, trauma protection is no longer covered or an option.

You might not be covered at all

If youʼre under 25, youʼre not covered.

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 Superannuation is the best way to do it.

And there is nothing wrong with that.

Through a life insurance broker or financial planner, Australians can size up a suitable retail life insurance policy and still nominate to pay for life insurance through Super.

There are even online life insurance brokers who specialise in helping Australians optimise life insurance still paid through Super.

Better still, through “superlinkingˮ, you can separate income protection, TPD

and trauma and pay for these directly meaning you get the full benefits of these products whilst still paying for life insurance through Super.