Life insurance: comparison of superannuation and stand alone policies

Life insurance is available through two major sources; superannuation funds and stand alone policies. Determining whether you are appropriately covered can be difficult, as life insurance policies vary depending on the source and factors such as cause of death, age and illness.

In the event of the death of the policy holder, life insurance ensures that you continue to provide for family members and dependents. It is designed to pay a lump sum to the policy holder's nominated beneficiary in the event of death or sometimes a terminal illness that is likely to result in death (normally within a year of diagnosis).

Life insurance through superannuation funds

Most superannuation fund providers offer life cover, but it is widely considered to be insufficient in comparison to a stand alone policy. Super funds generally offer a lump sum payment in the event of death if the policy holder has been paying a minimum annual premium of $200. It is not uncommon to purchase a stand alone policy on top of your superannuation cover.

Advantages of life insurance through super:

• Significantly cheaper premiums
• No medical exams necessary
• Some funds offer income protection and total and permanent disability (TPD) cover.

Disadvantages of life insurance through super:

• While premiums are cheaper compared to stand alone policies, the lump sum payout will be much less
• You have to be severely disabled to benefit from TPD cover
• It is not common to receive a payout if you're recovering from an illness
• Many providers do not offer income protection and if they do, it is usually only valid for two years.

Stand alone life insurance policies

Stand alone policies are more expensive, but they offer a significantly larger payout than superannuation funds and can be tailored to suit your lifestyle. For example, if you are a non-smoker, you may pay less for your premium than a smoker.

As stand alone policies are comprehensive, you may even find one that covers funeral costs. Like any insurance policy, life insurance can vary in what it does and does not cover, so make sure yours includes all the features you require. Most policy payouts are dependent on the cause of death and providers generally will not offer a payout if the policy holder committed suicide.