On the surface, paying for insurance through your super seems simple and convenient. Yet, this choice can have implications for your retirement savings.

At Pearler, our philosophy centres on long-term wealth building, so it’s worth considering how this decision might impact your future. Let’s explore the pros and cons of both options to help you make a choice that aligns with your goals.

What insurance does super provide?

Superannuation funds in Australia often bundle certain types of insurance into their offerings, including:

1. Life insurance (death cover): Pays a lump sum to your loved ones if you pass away
2. Total and permanent disability (TPD) insurance: Provides financial support if you’re unable to work again due to illness or injury
3. Income protection insurance: Replaces part of your income temporarily if you can’t work due to illness or injury

The group rates negotiated by super funds often make these policies affordable, and many funds include them by default. The premiums are deducted straight from your super balance, so for people who don't want to think about super, it can be a popular choice.

You can learn more about insurance and super in our article: ‘ Which types of insurance insurance does superannuation provide? ’.

What you get with insurance outside super

Taking out insurance outside of super can give you more flexibility and options to tailor coverage to your needs. Here’s what you can expect:

1. Life insurance: Generally offers more comprehensive and customisable policies compared to super
2. TPD insurance: Can be bundled with life insurance or purchased separately, often with more flexible definitions of "disability”
3. Income protection insurance: Usually offers longer benefit periods and more tailored options than super-based policies
4. Trauma insurance: Provides a lump sum payment if you’re diagnosed with a serious illness like cancer or stroke, or suffer a major injury – a type of insurance not available in super

In addition to these options, insurance outside super can open the door to even more specialised coverage. For instance, health insurance can help cover the costs of medical treatments and hospital stays, along with other health expenses like dental and optical.

Although premiums for policies outside super are generally higher, they’re paid directly from your bank account, leaving your retirement savings untouched. This approach can ensure your long-term investments stay on track while giving you more control over the type and level of coverage.

Why some people choose insurance inside their super

The convenience of having insurance within super is often its major selling point. Here’s why many Australians opt for this setup:

• No immediate impact on cash flow: Since premiums are deducted directly from your super balance, they don’t affect your everyday budget . This could make it easier to maintain financial stability while staying covered
• Hassle-free setup: Most super funds include insurance automatically, saving you the time and effort of researching and applying for separate policies
• Less to manage: Insurance within super is seamlessly integrated, meaning you don’t need to juggle multiple accounts or payments, theoretically reducing administrative hassle
• Accessible coverage for high-risk individuals: Super fund policies often don’t require individual health assessments, making it easier for people with pre-existing conditions or risky jobs to get insured
• Tax advantages: Premiums are paid using concessional contributions taxed at lower rates, reducing their effective cost compared to paying out-of-pocket after-tax premiums
• Automatic continuity: As long as your super balance covers the premiums, your insurance remains in place without the risk of lapsed payments

The downside: it can chip away at your retirement savings

While insurance inside your super might feel convenient now, it can come at a cost – and not just the premiums. The real issue is the long-term impact on your retirement nest egg.

1. Lost growth potential: Every dollar used to pay for insurance is a dollar that’s no longer invested in your super. Over time, those lost dollars could have compounded into significantly larger sums
2. Reduced retirement balance: If you’re only contributing the minimum required by your employer, insurance premiums eat into that, leaving less to grow for your retirement
3. Less comprehensive coverage: Insurance policies within super often come with restrictions, like shorter benefit periods for income protection or stricter definitions for TPD claims
4. The hidden cost of convenience: While it’s easier to pay for insurance this way, the long-term financial impact might outweigh the short-term simplicity
5. Extended leave: Should you take an extensive period of leave (like parental leave), you could see your insurance cancelled due to lack of contribution. This could have major implications if you're not aware of it.

Why paying outside super aligns with long-term investing

The long-term investing philosophy is about maximising your financial potential over the long haul. Depending on your circumstances, paying for insurance outside super can fit well with this approach because it keeps your super contributions fully invested, preserving their growth potential.

Yes, paying out of pocket for insurance requires careful budgeting, but it also ensures your retirement savings remain untouched. Over time, this can make a significant difference to your final super balance .

As always, only you can make the right decision for you, so speak to a financial adviser to help guide you. If you’re serious about building wealth and achieving Financial Independence, the extra effort to fund insurance outside your super might be worth it.

Making the right choice for your situation

Choosing between insurance inside or outside your super isn’t one-size-fits-all. Your decision will depend on your financial goals, lifestyle, and priorities. Here’s what to consider:

1. Your cash flow: If you’re stretched financially, insurance inside super might make sense for now
2. Coverage needs: Does your super fund offer enough coverage for your circumstances? If not, you might need to look outside
3. Retirement goals: Are you aiming to maximise your super balance for a comfortable retirement? Paying for insurance separately might help
4. Your health and lifestyle: Some standalone policies offer more tailored coverage that better suits your needs
5. Get professional advice: A financial adviser can help you weigh up the pros and cons based on your unique situation

Do your research and think long-term

Insurance can be a helpful part of protecting your financial future, but how you pay for it can have lasting consequences. While insurance inside your super is convenient and affordable, it comes at the cost of your retirement savings. On the other hand, paying for insurance outside super may require more effort upfront, but can keep your investments intact for long-term growth.

Again, the best choice depends on your personal circumstances. Do your own research, crunch the numbers, and if in doubt, seek advice from a licensed financial adviser.

At Pearler, our goal is to help you make well-informed decisions that support your long-term financial goals. Ultimately, the best financial choices are those that stand the test of time and align with your priorities.

Happy investing!