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Compare life, TPD, trauma, and income protection premiums inside vs outside super. See the real drag on your salary and super balance — and which structure makes more sense for your situation.
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| Cover | Inside Super /mth | Outside Super /mth | Super drag /yr | Salary impact |
|---|---|---|---|---|
Life Insurance $1.00m | $177 | $212 | 1.18% | 3.4% |
| Inside super: premiums paid from pre-tax super contributions, but death benefit may be taxed up to 32% if paid to non-dependants. Outside super: premiums are not tax-deductible (for individuals), but proceeds are generally tax-free. | ||||
TPD Insurance $750,000 | $153 | $229 | 1.02% | 3.7% |
| Inside super: 'any occupation' definition only (more restrictive). Cheaper due to group rates and tax treatment. Outside super: 'own occupation' available (pays if you can't do your specific job), but premiums are not tax-deductible. | ||||
Trauma (Critical Illness) $300,000 | N/A | $130 | — | 2.1% |
| Trauma insurance CANNOT be held inside super. It must be purchased outside super. Premiums are not tax-deductible for individuals. Benefits are paid as a lump sum directly to you, tax-free. | ||||
Total | $329 | $570 | 2.19% | 9.2% |
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Life, TPD, trauma and income protection: inside vs outside super
Most Australians have default life and TPD insurance inside their super fund. It feels cheap because you do not see it leave your bank account — but it quietly erodes your super balance every year. Understanding the true cost, and whether to hold insurance inside or outside super, is one of the most underappreciated personal finance decisions you can make.
Life insurance: inside vs outside super
Life insurance held inside super is generally cheaper because premiums are paid from pre-tax super contributions and group rates apply. The key catch: benefits paid to adult non-dependants (such as adult children) can be taxed at up to 32% including Medicare levy. Benefits paid to a spouse or financially dependent children are generally tax-free.
TPD: the "any occupation" problem
TPD inside super must use the "any occupation" definition — you can only claim if you are unable to work in ANY job for which you are reasonably suited by education, training, or experience. Outside super, "own occupation" cover is available, which pays if you cannot perform your specific occupation. A surgeon with an "own occupation" policy can claim if they can no longer perform surgery, even if they could theoretically work in administration.
Trauma: only available outside super
Trauma (critical illness) insurance cannot be held inside super under Australian superannuation law. It must be purchased and paid for outside super. This means premiums are after-tax dollars, but benefits are paid as a tax-free lump sum directly to you without any superannuation or trustee involvement.
Income protection: the tax deduction advantage
Income protection held outside super is one of the few insurance premiums that is tax-deductible for individuals. For someone on a 37% marginal tax rate, a $3,000/year premium effectively costs only $1,890 after tax. Inside super, no deduction is available and benefits are limited to two years for policies started after 31 March 2020.
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If you have or are considering an SMSF, insurance inside an SMSF is structured very differently. Check the SMSF cost calculator.
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Insurance structuring is a common reason to engage a financial adviser. See when advice fees pay for themselves.
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