Life Insurance through super vs direct cover

Life insurance can play an important role in helping provide financial support to loved ones if something unexpected happens. In Australia, life insurance can often be held in two ways: through your superannuation fund or through an individual life insurance policy purchased outside of super (for example, online via Medibank Life Insurance).

Both approaches can help provide protection, but they work in different ways. Understanding how life insurance through super compares with direct life insurance may help you better understand how insurance is structured and what factors people sometimes consider when reviewing their cover.

What is default life insurance through superannuation?

Default life insurance through superannuation is commonly provided by super funds as part of a member’s account. Many funds automatically arrange a basic level of insurance cover when someone joins the fund, particularly if they are employed and making regular contributions.

In this arrangement, the super fund owns the insurance policy and provides cover to members under a group insurance arrangement.

Premiums are typically deducted from the member’s superannuation balance, rather than being paid directly from personal income. While this can make premiums easier to manage day-to-day, the deductions may reduce the superannuation balance available for retirement over time. It’s important to check your fund’s rules to understand when your insurance might lapse or cancel.

Eligibility for cover can depend on factors such as:

• age
• employment status
• income
• occupation
• contribution activity

When you may not have cover under your super fund:

• If your account balance is under $6,000 or you’re under age 25, unless you opt-in to cover via your super fund
• If your contributions stop for a continuous period of 16 months, your life insurance will automatically be cancelled, unless you opt in to retain your cover
• When you reach the expiry age

What types of insurance can be held in super?

Life cover (death cover)

Life cover may pay a lump sum if the insured person passes away or is diagnosed with a terminal illness.

Total and permanent disability (TPD) cover

TPD insurance may provide a lump sum payment if a person becomes permanently unable to work due to illness or injury and meet the Australian Superannuation Conditions of Release.

Income protection

Income protection through superannuation can be provided by super funds as part of a member’s account. Income protection provides cover for a percentage of your monthly income up to a certain amount. This may not be automatic, so it is important that you contact your super fund directly to check.

What is direct life insurance?

Direct life insurance, like Medibank Life Insurance is purchased outside of superannuation directly from an insurer. In this structure, the individual applying for cover owns the policy and pays premiums directly to the insurer.

Direct life insurance policies allow individuals to choose different types of cover such as:

• Life cover
• Total and permanent disability (TPD)cover¹
• Critical illness cover¹
• Child cover¹
• Income protection cover

Applications for direct life insurance typically involve underwriting, where the insurer considers information about your medical history, health, occupation, lifestyle and family history when assessing cover.

For example, Medibank Life Insurance allows eligible applicants to choose a sum insured between $50,000 and $2,500,000 for Life Cover, depending on factors such as age and income².

Premiums for direct life insurance are generally paid from personal income rather than from a superannuation balance.

Life insurance through super vs direct cover: key differences

Although both types of insurance may help provide financial protection, there are some structural differences.

How flexibility may differ between the two options

Group insurance held through super is designed to provide a level of cover to a large number of members. As a result, cover levels, eligibility conditions and policy terms are typically standardised.

With Direct life insurance, you have the flexibility to choose the cover amount and types of cover that align with your circumstances, subject to underwriting and policy terms¹.

With both group and direct life insurance policies, premiums generally increase as the insured person gets older.

Is life insurance through super enough?

For many Australians, insurance through superannuation provides a starting level of protection.

However, default cover levels are often designed to suit a broad group of members. Some individuals review their insurance arrangements if their financial commitments change over time, such as:

• taking on a mortgage
• starting a family
• changes in income or occupation
• increased financial responsibilities

If you’re unsure which option may suit your situation, a financial adviser can help you understand the potential advantages and considerations of different insurance arrangements.

Can you hold life insurance both inside and outside super?

Yes, you can have life insurance both inside and outside superannuation.

Some people maintain their existing super insurance while also taking out a separate Direct life insurance policy. Others review their super insurance if they obtain cover outside super.

Before making changes to insurance arrangements, it can be helpful to review the relevant Product Disclosure Statement (PDS) and understand the terms and conditions of the policy. You can find Medibank’s Life Insurance PDS here. 

Ownership, claims and tax considerations

Ownership of the policy is one of the key differences between insurance held through super and insurance held directly.

With superannuation insurance, the super fund trustee owns the policy. If a claim occurs, the benefit is generally paid to the super fund first before being distributed to beneficiaries according to superannuation rules.

With direct life insurance, the policy owner owns the policy, and claims are typically assessed by the insurer and paid to policy owner, nominated beneficiaries or to their estate.

Tax treatment can also differ depending on the structure of the insurance and who receives the benefit:

• Premiums for insurance within super may be tax-deductible to the super fund.
• Life insurance benefits are often paid tax-free to financial dependants, although tax may apply depending on the beneficiary and structure of the policy.

Premiums for direct life insurance are generally not tax-deductible. It is best to speak to your financial adviser/accountant for advice.

Reviewing your life insurance cover

Whether insurance is held through superannuation, through a Direct life insurance policy, or a combination of both, it’s important to review your cover periodically as your circumstances change.

Factors people may consider when reviewing their insurance arrangements include:

• the level of financial commitments they have
• whether they have dependants
• the amount of cover currently in place
• how premiums are paid
• policy terms and eligibility conditions

Understanding how life insurance through super compares with Direct life insurance can help to better understand how difference cover options are structured.

Have a look at the Medibank Life Insurance PDS. You can also get a quick quote online or call the Medibank team on 1300 152 271 if you’d like to talk to us about Medibank Life Insurance.