Costs, Cover Types and 2026 Rules
Life insurance inside super vs outside super: how to choose
Compare cover through your super fund with retail life, TPD and income protection policies on cost, definitions, tax, underwriting and who receives the payout.
Cover inside super is usually cheaper and does not come out of your take-home pay, but it is narrower: no trauma cover, an "any occupation" style TPD test, shorter income protection benefit periods in many funds, and the premiums reduce your retirement balance. Retail cover outside super costs you after-tax money (except deductible income protection), but you control the policy, can choose own-occupation TPD and longer benefit periods, and death benefits go straight to the people you name. Many people end up with a mix: base death and TPD cover in super, plus income protection or extra cover outside.
This guide is part of the costs and rules overview. Figures are illustrative.
The main differences
| Issue | Inside super | Outside super (retail) |
|---|---|---|
| Who owns the policy | The fund trustee, under a group policy | You (or a partner, company or trust) |
| Who pays | Deducted from your super balance | You, from your bank account |
| Personal tax deduction for premium | No (the fund claims it) | Income protection only |
| Trauma cover | Not allowed | Available |
| TPD definition | Must align with the permanent incapacity condition of release; own occupation not allowed for new cover since 1 July 2014 | Own occupation or any occupation |
| Income protection benefit period | Often 2 years in default cover; some funds offer longer | Commonly 2 years, 5 years or to age 65 |
| Underwriting | Default cover often automatic; extra cover needs health questions | Full underwriting at application |
| Cover can stop because of | Inactivity, low balance, age limits, leaving the fund, the trustee changing insurer | Not paying the premium; expiry age |
| Death benefit paid to | Dependants or estate under fund rules and your nomination | The beneficiary named on the policy, or your estate |
| Tax on death benefit to adult children | Generally 15% or 30% plus Medicare levy on the taxable component | Generally none |
| Complaints | Trustee first, then AFCA | Insurer first, then AFCA |
Why super cover is cheaper
Super funds buy cover for thousands of members under one group policy. Default cover is often issued with limited or no individual health checks, priced as an average across the membership. The premium is paid from contributions that have already had only 15% contributions tax taken out, and the fund can deduct the premium against its own tax. For someone on a 30% or higher marginal rate, a dollar of premium paid from super can cost less in after-tax income than a dollar paid from their pay.
But the cost does not disappear. A premium of $60 a month for 30 years reduces your retirement balance by much more than the $21,600 in premiums, because the money also loses its investment earnings. The cost of cover in super calculator shows this; at an assumed 7% return the illustrative balance reduction is about $73,200 before earnings tax. See the worked example in the cost of insurance premiums in super.
Why definitions matter more than price
Superannuation law only lets a trustee release benefits when a member meets a condition of release. Insurance in super must line up with those conditions:
- Death and terminal medical condition for life cover.
- Permanent incapacity for TPD: the trustee must be reasonably satisfied that you are unlikely, because of ill health, ever to work again in a job for which you are reasonably qualified by education, training or experience.
- Temporary incapacity for income protection.
There is no condition of release for a trauma diagnosis, which is why trauma cover cannot be held in super, and an own-occupation TPD payout could be paid by the insurer to the fund but then be stuck there. That is why own-occupation TPD has not been allowed for new cover in super since 1 July 2014. See TPD definitions.
Linked or split cover
Some retail insurers offer super-linked or flexi-linked cover. The any-occupation part of TPD is held inside super and paid by rollover, while an own-occupation or trauma part is held outside super and paid personally. Income protection can be split similarly, with a basic benefit inside super and extra options outside. These arrangements can lower cash-flow cost while keeping broader definitions. Ask how premiums are split and what happens if one part is cancelled.
Worked example: base cover in super, extras outside
Illustrative household: Sam, 38, a site supervisor earning $110,000, with a partner, two children and a $520,000 mortgage.
- Sam's industry fund provides default death and TPD of $300,000 and income protection of 75% of salary for 2 years after a 60-day wait, costing about $14 a week from the super balance.
- A needs calculation (see how much life cover do I need) suggests about $1.1 million of life cover.
- Sam keeps the fund cover and applies through the fund for extra death cover, raising it to $800,000, then buys a $300,000 retail term life policy, so the total is $1.1 million.
- Sam buys a retail income protection policy with a 90-day wait and benefit to age 65 to sit behind the 2-year fund cover. Most policies offset other disability income, so the two cannot add up to more than the policy limits allow. Sam sets the retail benefit with this in mind.
The household now has the low cost of group cover for the base layer, and retail terms where the fund's terms fall short.
Questions to ask your fund
- What death, TPD and income protection cover do I have, and what does each cost a week?
- Is my cover fixed or unitised, and how does it change with age?
- What TPD definition applies, and is there an age where cover reduces or stops?
- What waiting period and benefit period apply to income protection, and is it offset by sick leave or workers' compensation?
- Does my cover need opting in because of my age, balance or inactivity? See the opt-in rules.
- What happens to my cover if I change jobs or roll my balance to another fund?
Frequently asked questions
Can I keep insurance in super after I leave my employer?
Usually, as long as the account keeps receiving contributions or you opt in to keep cover when it becomes inactive. Some employer plans move you to a retained or personal division with different premiums.
Is a retail policy always better?
No. It is broader, but it costs more from your own pocket and requires underwriting. If your health has changed, cover in super issued without health questions may be the only cover you can get.
Can my fund change my cover?
Yes. The trustee can change insurer or terms for the whole membership. Funds must notify members, so read significant event notices.
Sources
- Moneysmart — insurance through super and how to check your cover
- ATO — super, conditions of release and tax on super benefits
- APRA — insurance in super and trustee obligations
- AFCA — complaints about super trustees and insurers
