For many Australians, the first encounter with life insurance is through their super fund. It seems straightforward: you’re automatically signed up, the cost is deducted from your account, and you don’t have to wade through endless paperwork. On the surface, it feels like a convenient safety net. But convenience doesn’t always equal complete protection, and the hidden drawbacks can leave people unprepared when it matters most.
Why relying solely on super-based insurance can be risky
Default insurance inside super is usually bundled as life cover, total and permanent disability (TPD), and sometimes income protection. The premiums are deducted directly from your balance, so you rarely notice the cost. Because it’s offered to large groups, health checks are often minimal, which is a benefit if you’ve had medical concerns in the past.
However, the reality is that the sums insured are typically designed for the “average” member – and very few people are actually average. If you have a mortgage, kids, or financial dependants, the default payout could be far too low to cover debts, replace income, or maintain your family’s lifestyle. On the flip side, you might be paying for more cover than you realistically need, gradually chipping away at your retirement savings.
The fine print that often gets overlooked
1. Stricter definitions for TPD
Superannuation law requires that disability benefits meet strict criteria. To receive a payout, you generally need to prove that you’re unlikely to return to work in your current field of training and experience. For part-time workers or those not employed at the time of injury or illness, funds often apply an “activities of daily living” test – a much harder standard to meet. Outside-super TPD cover, by contrast, often allows for an “own occupation” definition, making claims more achievable.
2. Limitations on income protection
Income protection through super tends to come with caps and strict offsets. This means any other payments you receive, like workers’ compensation or sick leave, can reduce your benefit. Policies also usually have shorter benefit periods than retail cover. Many people assume they’re protected for years, only to discover that payments stop after a much shorter timeframe.
3. Automatic cancellations you may not notice
If you stop contributing to your super for 16 months – for example, during parental leave, a job change, or self-employment – your insurance can lapse without warning unless you opt in to keep it. Once cancelled, reinstating cover can be difficult, especially if your health has changed.
4. Premiums eating into your future
Because costs are quietly deducted from your super balance, it’s easy to underestimate how much you’re really paying. Over decades, those premiums (and the investment growth you miss out on) can have a noticeable impact on your retirement savings.
5. Beneficiary and tax complications
With insurance inside super, payouts are directed by the trustee under superannuation law, not automatically to the person you nominate. If you haven’t made a valid binding nomination, the process can be delayed or result in money being distributed in ways you didn’t intend. Tax treatment also varies: some beneficiaries may face unexpected tax on payouts, while benefits from policies held outside super are often more straightforward.
6. Pre-existing condition exclusions
While group cover makes it easier to get insured without medical checks, it also comes with blanket exclusions. If you make a claim, pre-existing conditions or waiting periods could reduce or deny your payout.
7. Occupation misclassification
Many funds group members into broad job categories. If you’ve moved from a physically demanding role to a professional desk job, your premiums or cover terms might not reflect your true risk level – costing you more than necessary.
When to look beyond your super fund
Super-based insurance can provide a solid foundation, but it’s rarely enough for those with financial responsibilities. If you have dependants, a mortgage, or run a business, chances are you’ll need more than the default. Outside-super cover allows for tailored benefits, broader definitions, and greater flexibility around tax and beneficiary arrangements.
Final thoughts
Relying on your super fund’s default life insurance might feel like a set-and-forget solution, but the risks of underinsurance, restrictive conditions, and automatic cancellations are very real. Taking the time to review your policy, check the definitions, and compare with external options could mean the difference between your loved ones being fully supported or left struggling at a critical time.
