Superannuation death cover (also known as life cover) is a type of life insurance cover. It pays a specified amount of money (or benefit) when you die. The money goes to whoever you have nominated as beneficiaries on the policy. If you don’t nominate anyone, a trustee or your estate will decide where the money goes.
The amount of the benefit paid is the money in your super account at the time of death, plus any life insurance cover through your super fund.
Isn’t my super covered by my will?
Generally, your will only covers the things you own, for example your house, car and other personal items. It can also include savings accounts, shares and investments.
However, your super is different because it is held in trust for you by the trustee of your super fund. Superannuation is also governed by specific laws and regulations, so you need to stay up to date with your instructions to your super fund regarding your wishes.
Who gets my death benefit?
Upon your death, your super fund trustee usually pays your death benefit to one or more of your dependants or to your estate. In this case, 'dependants' includes:
- Your spouse (including de facto and same-sex de facto partners)
- Your children
- People who depend on you financially
- People you’ve had an interdependency relationship with
An 'interdependency relationship' exists if two people:
- Have a close personal relationship
- Live together
- Provide each other with financial support or domestic support and personal care
Most super funds will let you nominate the people you want your death benefit paid to, by making either a binding or a non-binding nomination.
A binding nomination means that your super fund trustee has no choice about who gets your death benefit funds because you have already made the decision. The money can go to either:
- One or more of your dependants
- Your personal legal representative, who must pay out the money according to your will
A non-binding nomination gives some guidance to the super fund trustee on who will get your super benefits, but they are not required to follow the instructions in your will. The trustee has the final say, especially if you nominate someone who doesn't depend on you. You might make a non-binding when you think your circumstances may change (for example having a child, or more children) or separating from your partner.
If you don't nominate anyone, the trustee will decide who your money goes to. This is not ideal, because it can result in delays and arguments among your family about who should get the money.
How is the death benefit paid?
There are two ways for superannuation death benefits to be paid: as a lump sum or as an income stream.
If your beneficiaries are dependants, the death benefit can be paid as either a lump sum or an income stream. However, if the beneficiaries are not dependants, then they must have the benefit paid as a lump sum.
What are the pros and cons of having superannuation death cover?
The pros of having superannuation death cover are:
- Cover through your super fund can be cheaper than stand-alone life insurance.
- It may be easier to manage your cash flow since the premiums will be deducted from your superannuation account rather than your bank balance
- Most superannuation funds will not require a medical examination for standard cover (although one may be required if you want a higher level of cover)
- Super policies may also include total and permanent disablement (TPD) and/or income protection insurance
- If you arrange to salary sacrifice the cost of the premiums instead of having them deducted from you superannuation account balance, there may be tax benefits
What are the cons of having superannuation death cover?
The cons of having superannuation death cover are:
- Super fund insurance may not give the same degree of cover, or enough cover to effectively protect you and your family
- You need to make a binding nomination to be sure your money goes where you want it to, otherwise a trustee may decide it should go somewhere else
- The death benefit payouts have to go through your superannuation fund before they go to your beneficiaries, meaning there can be a delay in the benefit being paid. If you have made a non-binding nomination or none at all, the process will be delayed while the trustee determines the correct beneficiary
- If you have the premiums deducted from your super account, it means you have less money to be invested and maybe less when you retire (although you can make personal additional contributions to offset this)
Ultimately, the best idea is to explore all the options, to decide whether superannuation death benefit is the best fit for you and your circumstances, both now and in the long term.