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Smart structuring can lower your tax burden, expedite claims, and keep more in your pocket. Use the checklist to find your ideal fit and then seek expert advice.
Why this decision matters
Where you hold your cover effects cash flow, tax, claim speed and who ultimately receives the money. Many Australians accept default insurance inside super without checking if a hybrid or external strategy would work better. Superannuation and personal insurance have different tax rules, claim steps and product features. Understanding these differences helps you build a structure that matches your goals and family setup.
The short answer
There is no single best answer. Many people use a hybrid. Life and some TPD inside a super can be cost-effective and straightforward. Income protection outside super is often more beneficial in terms of features and tax benefits. Trauma is generally outside super because it does not align with superannuation conditions of release. Your ideal mix depends on income, tax bracket, cash flow, age, beneficiaries and how quickly you may need benefits paid.
What super can and cannot hold
Most funds can hold life, TPD and income protection. Trauma is generally not allowed inside super for new policies. If you want trauma, hold it personally. Be aware that own occupation TPD is usually not available within super funds and may need to be purchased separately for broader definitions.
The quick comparison
| Inside super | Outside super |
| Premiums are deducted from your super balance, which helps improve household cash flow. | Premiums come from take home pay. |
| The fund usually claims the premium deduction, not you. | Income protection premiums are usually deductible to you. |
| Group cover can be cheaper, but with tighter definitions and lower maximums. | Life and TPD premiums are generally not deductible. |
| At claim time, benefits are paid to the fund first and then to you if a condition of release is met. | Broader features and more choice, including trauma and own occupation TPD. |
| Default cover can switch off for under 25s, balances under $6,000 or inactive accounts unless you opt in. | Claims are paid directly to you, without the need for trustee steps. |
Tax in plain English
Income protection
Outside super, premiums are usually deductible, and benefits are taxable income. Inside super, you cannot personally claim the premium and benefits paid to you are taxable income once the fund releases them.
TPD
Personally owned TPD lump sums are typically received tax-free. Inside super, a successful permanent incapacity claim increases the tax-free component using a statutory formula. Any remaining taxable component may still be subject to tax upon withdrawal.
Life insurance
Inside super, a lump sum death benefit paid to a spouse or other tax-dependent is generally tax-free. Adult non-dependent children may pay tax on the taxable component. Personally owned life cover is generally received tax-free by beneficiaries.
Trauma
Trauma benefits from a personally owned policy are generally received tax-free and are not assessable income. Premiums are not deductible. Trauma is typically not available as an option inside Super for new policies.
Product settings to note
Recent regulatory changes have removed the agreed value and tightened the income protection design for new policies. Compare definitions, offsets and benefit periods carefully.
Three practical scenarios
Young professionals with tight cash flow
- Life and TPD in super can keep premiums off the household budget. Add income protection outside super to claim the deduction and get stronger features. If the budget allows, add trauma outside the super for a lump sum on diagnosis of a critical illness.
High-income earners
- The income protection deduction becomes more valuable at higher marginal tax rates. Consider keeping life insurance in super if it helps with cash flow but model the impact on adult children who may not be tax dependents for super death benefits. Consider own occupation TPD and trauma outside super for stronger definitions.
Self-employed or business owners
- Claim speed and control matter. Policies outside of super can be paid directly to you without trustee steps, which can help with business continuity. A hybrid can still work. For example, baseline life cover within super, income protection, and trauma cover outside super.
The hybrid approach in practice
A balanced structure for a 40-year-old professional might be:
Inside super
A one-million-dollar life insurance policy and a one-million-dollar TPD policy on any occupation for an affordable baseline cover.
Outside super
Ten thousand dollars per month in income protection on own-occupation, benefit period to age 65, with a ninety-day wait, and premiums usually deductible.
Outside super
Five hundred thousand dollars trauma cover to fund treatment, a mortgage or time off work without waiting for trustee release.
This mix manages cash flow, utilises tax rules effectively, and enhances definitions and claim processing speed where it matters.
When to review
- Income changes
- You buy property or take on debt
- You have children, or they become financially independent
- You change careers or become self-employed
- Within ten years of retirement
- Legislation changes
- Health changes
A quick checklist
- Confirm beneficiaries and whether they are tax dependents for super
- List cover amounts inside and outside super, including trauma
- Verify that your super account is active and that your insurance has not lapsed
- Compare costs after tax and the impact on your concessional cap
- Model claim cash flow timing. Consider the trustee release option within super versus direct payment outside super
The bottom line
There is no universal answer to whether insurance should be in a super fund or not. Most Australians benefit from a hybrid that keeps costs manageable in super while placing feature-rich cover outside for faster, cleaner claims. Run the numbers, check your beneficiaries and seek personalised advice so the structure truly protects your family.
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The Money & Life website is operated by the Financial Advice Association (FAAA). The views expressed in this article are those of the author and not those of the FAAA. The FAAA does not endorse or otherwise assume responsibility for any financial product advice which may be contained in the article. Nor does it endorse or assume responsibility for the information.
