The Hidden Cost of Insurance Inside Your Super
Open your latest super statement and look for the line that says something like "insurance premiums" or "insurance fees". For most Australians, it sits quietly between the contribution column and the investment return, deducted automatically each month, and most members could not tell you what it covers, how much cover they hold, or which insurer is underwriting it. That line item is the single most common form of life insurance in the country, and it is also one of the least examined parts of the retirement system.
Insurance inside super was designed as a safety net for under-insured Australians who would otherwise have no cover at all. Default settings, opt-out architecture, and group policy economics have quietly turned that safety net into a stealth tax on compounding for everyone else. Whether the cost is worth paying depends entirely on circumstances that most members have never been asked to consider.
Dave Rae, Financial Adviser at UNLESS Financial and one of Financial Standard's Power 50 Most Influential Advisers, like to raise this with clients nearing retirement. He tends to see the same pattern amongst Australians in their late 50s and early 60s discovering they have been paying premiums on cover they no longer need, or worse, cover that will reduce or expire entirely at age 65 just as their balance is at its peak. As a former director of the Responsible Investment Association Australasia and an active impact investor, Dave's view is that good super decisions start with knowing what you are paying for, before deciding what to change.
How default insurance ended up in your super in the first place
Insurance through super was built into the system from the start. The logic was sound. Most working Australians do not buy retail life or disability insurance on their own, so bundling a default level of cover into super meant that families had at least some financial protection if the main earner died or could no longer work. Group policy economics made the premiums cheaper than retail equivalents, and because the cost came out of super rather than take-home pay, members rarely noticed it.
That model worked reasonably well for full-time workers in their 30s and 40s with dependants. It worked less well for young people with low balances, people with multiple jobs and therefore multiple accounts, and anyone whose life circumstances no longer matched the cover they had been auto-enrolled in.
Two reforms attempted to fix the worst leaks. The Protecting Your Super reforms in 2019 switched off insurance for inactive accounts with balances under $6,000, and the Putting Members' Interests First reforms in 2020 made insurance opt-in rather than default for new members under 25 or with balances below $6,000. Both were aimed at the most obvious problem of premium drag eroding small balances. Neither addressed the harder question of whether default insurance is still right for working adults whose balances have grown and whose lives have changed.
For everyone above those thresholds, the defaults still kick in, the cover is still bundled, the premiums still come out automatically, and most members still do not know what they are paying for.
The first hidden cost: premium drag on a compounding balance
Every dollar paid in insurance premium is a dollar that is not invested. Over a working lifetime, that drag compounds in the same way that fees and returns compound, just in the opposite direction. The exact figure depends on the cover held, the fund, the member's age and occupation, but the mechanism is the same for everyone: premiums are deducted from the balance before the investment return is applied, so the lost compounding is permanent.
For a member in their 30s, the drag on a single account is usually modest. For a member in their late 50s, where premiums have typically risen with age and the balance is at its largest, the drag is more pronounced. This is the part of the cost most people do not see, because it never shows up as a single number. It shows up as a smaller balance at retirement than would otherwise exist, which is a comparison most members never run.
The problem compounds when members also hold more than one super account. According to ATO data, around four million Australians had two or more super accounts as at 30 June 2024. Each additional account typically carries its own default insurance cover, which means duplicate premiums coming out of multiple balances every month. Duplicate premiums rarely translate into duplicate payouts. Most group policies contain claim offset clauses, which means that if a member claims on one policy, the payout from a second policy can be reduced or offset by the amount already paid.
The second hidden cost: cover that doesn't fit your life stage
Default insurance is calibrated for an average working adult, which means it is rarely calibrated for anyone in particular. Two common mismatches show up.
Younger members with mortgages and dependants are often under-insured, because default cover is set conservatively and was reduced further after the 2019 and 2020 reforms. The cover they have through super may not be enough to clear a mortgage or replace lost income for a family that depends on a single earner.
Older members approaching retirement are often over-insured. Default cover that made sense in your 40s may no longer match your situation if your children are independent, your mortgage is paid off, and your super balance itself is now a meaningful financial buffer. At the same time, premiums for life and total and permanent disability cover usually rise sharply with age, and many policies reduce or cease cover at age 65 or 70. The result is that members can end up paying the highest premiums of their working life for cover that is about to expire, at the point where the underlying need has already shifted.
The third hidden cost is the one most people miss
The deepest cost is structural rather than personal. Default insurance inside super exists because of a particular combination of opt-out architecture, low member engagement, and group policy economics. Members do not have to choose the cover, they rarely review it, and the fund and insurer continue to collect premiums month after month. That self-perpetuating revenue stream has been good for the insurance industry and uneven for members.
At a personal level, the cost is the compounding drag on your balance over decades, the duplicate premiums on old accounts, and the mismatch between cover and life stage. The 2019 Protecting Your Super and 2020 Putting Members' Interests First reforms patched the worst leaks for inactive accounts and young members, but for working adults above the thresholds, the defaults still apply.
At a system level, opt-out defaults plus disengagement plus group policy economics equals a self-sustaining stream of premiums flowing out of member balances and into insurer reserves. Even with the 2019 and 2020 reforms, the architecture still favours inertia over informed choice, and most members never receive a prompt to revisit cover that was set when they joined the fund.
At an economic and societal level, group insurance premiums paid through APRA-regulated super funds totalled around $9.5 billion in 2023-24, up roughly 7% on the prior year. Some of that money is well spent, paying out claims that families depend on. Some of it is aggregate balance drag, eroding national retirement adequacy and shifting pressure back onto the Age Pension over time. The number is large enough to matter at the country level, and the choices that determine where it lands are made one member at a time.
Questions worth asking before you change anything
Before changing anything, the most useful step is to understand what you actually have. Cancelling default cover without thinking it through can be expensive in a different way: if your health has changed since you joined the fund, you may not be able to get equivalent cover back, either inside super or in the retail market. This is the single most important thing to know before you touch your insurance. People who cancel default cover and later try to reinstate it after a diagnosis, an injury, or a change in occupation often find they are either declined or accepted only with significant exclusions and loadings. The cover that costs you compounding today may be the only cover you can get.
With that caution in mind, the questions worth asking your fund are:
What types of insurance do I currently hold, and what is the sum insured for each?
How much am I paying in annual premiums, and how has that changed in the last five years?
Does my cover reduce or cease at a particular age?
If I have other super accounts, do they also carry default cover, and what would consolidation mean for that cover?
If I were to apply for the same cover today through underwriting, would I qualify on the same terms?
Insurance in super was built as a safety net, not a default setting
Insurance through super was never meant to be a set-and-forget feature of the system, and the cost of treating it that way is paid quietly out of your balance every month for decades. The 2019 and 2020 reforms made the architecture less harmful for the most exposed members, but they did not turn defaults into deliberate choices for the rest. The members who get the most from insurance in super are those who have looked at what they hold, weighed it against their life stage and other cover, and decided either to keep it, adjust it, or replace it with something better matched, knowing that cancelling cover is not always something that can be undone.
This article contains general information only and does not constitute personal financial advice. UNLESS Financial Pty Ltd is authorised to provide financial services. Before acting on any information in this article, consider whether it is appropriate for your personal circumstances. You should seek advice from a licensed financial adviser.
Sources and further reading
Australian Financial Complaints Authority (AFCA) | [Superannuation complaints about PMIF and insurance cover] (https://www.afca.org.au/about-afca/publications/superannuation-complaints-about-pmif-and-insurance-cover) | 2024 | Background on the Putting Members' Interests First reforms and common member disputes about insurance cover in super
Australian Prudential Regulation Authority (APRA) | [Putting Members' Interests First – frequently asked questions] (https://www.apra.gov.au/putting-members%E2%80%99-interests-first-%E2%80%93-frequently-asked-questions) | 2020 | Official guidance on the PMIF reforms covering young members and low-balance accounts
Australian Securities and Investments Commission (ASIC) | [Insurance through super] (https://moneysmart.gov.au/how-life-insurance-works/insurance-through-super) | 2025 | MoneySmart guidance on how default insurance through super works, types of cover, and what to check
Australian Taxation Office (ATO) | [Trend towards single accounts] (https://www.ato.gov.au/about-ato/research-and-statistics/in-detail/super-statistics/super-accounts-data/super-data-lost-unclaimed-multiple-accounts-and-consolidations/trend-towards-single-accounts) | 2025 | Statistics on Australians with multiple super accounts, including the around four million members with two or more accounts as at 30 June 2024
Association of Superannuation Funds of Australia (ASFA) | [The future of insurance through superannuation] (https://www.superannuation.asn.au/wp-content/uploads/2023/09/Insurance_through_superannuation_FINAL_v2.pdf) | 2022 | Industry analysis of insurance through super, including cost structure, claims, and policy considerations
Financial Standard | [Group insurance premiums paid by super funds up 7%] (https://www.financialstandard.com.au/news/group-insurance-premiums-paid-by-super-funds-up-7-179808973) | June 2025 | Reporting on the $9.5 billion in group insurance premiums paid by APRA-regulated super funds in 2023-24
