Got kids? Got a good-sized debt, like a mortgage? Then life insurance is a no-brainer. Not an “I’ll think about it soon” kind of activity, like cleaning out the mess in the garage; it should be at the top of your To Do list.

But should you choose the default life insurance option in your super fund? Or choose individual insurance inside super, or insurance completely separate to your super?

The answer will depend on the type of policy that is required, whether you’re a young healthy adult, and what you are able to spare from your take-home pay.

Common ‘wisdom’ previously said that default life insurance through super was usually cheaper because the super fund buys the cover in bulk (‘group insurance’). However, this is not always the case as many group insurers have increased their premiums in recent years.

There may be many times when individual life insurance inside super is a less expensive (and a more comprehensive) option. While most super funds have a default level of cover which you can change depending on your particular needs, the maximum amount available may not be enough. This is why you may want to think about individual insurance cover inside super instead.

A strain off the hip pocket

There are good reasons for having life insurance through your super, especially if you have a hefty assortment of financial commitments. (Mortgage and young family, anyone?) With insurance through super, the premium is paid out of the funds in your superannuation account. So you won’t feel it leaving your pocket.

However, life insurance outside super provides a simple solution if you can afford to pay the full premium from your take-home pay.

The upshot? Don’t just accept the default cover that’s on offer in your super. Do your homework.

Making a claim

While it’s usually pretty straightforward, there are some potential pitfalls when insurance is owned inside super come payout time.

If your super recipients are not dependants, there may be tax implications. For example, if you pass away and your nominated beneficiaries are your adult independent children, then they could be hit with a large tax bill on the money they receive.

On this note, it’s important to nominate your beneficiaries very clearly to ensure that insurance proceeds are paid to the correct people and in the most tax effective way. Your financial adviser can help you with this.

Also be aware that you might have to wait some time for the super fund to release the insurance proceeds once they are received from the insurance company.

Don’t forget about income protection

Income protection can also be taken through your super but it may make more sense to consider such a policy outside super if you can afford it.

Don’t dismiss income protection as an unnecessary expense. One in five families will be impacted by an insurable event in their working lives such as being unable to work for an extended period.

So the argument for at least some level of cover is strong. After all, who’s paying the mortgage, and the school fees (and the rest) if a major chunk of your family income disappears for an extended period?

So, if you have debts and commitments you should consider life insurance, no question. Whether it’s in or out of super depends on you – just make sure you are paying a competitive rate on insurance that delivers the right cover for you. And then you can deal with the mess in the garage.

For more information on all things life insurance, contact us on 07 3397 7315.

1 THE LIFEWISE / NATSEM underinsurance report Understanding the social and economic cost of underinsurance February 2010.