SUPERANNUATION is not only a good, tax-effective way to save for your retirement. It can also be a good way to disaster-proof your family's finances by taking out life insurance with the product.

Buying life insurance through your super fund can be cheaper than purchasing it directly from insurers because funds are able to negotiate group rates to cover all of their members.

You also usually get the advantage of "automatic acceptance", which means the insurer will agree to cover you without a medical examination simply because you are a member of the super fund.

And within super you are paying for insurance premiums with pretax dollars, which means more for you to spend.

There are, however, traps that you need to watch for.

Any life insurance payout within super that is above $1,297,886 will be subject to tax as it exceeds the reasonable renefits limit. Outside of super, life insurance payouts are generally tax free.

Insurance within super becomes problematic when you start talking about cover other than straight life insurance. Cover such as income protection and total and permanent disability (TPD) can be obtained through super, but can prove seriously problematic in some circumstances.

If you take income protection outside of super, for instance, you are entitled to claim the premium as a tax deduction. However, this deduction is not available inside a super fund.

Also, super funds typically offer income protection policies that pay you for a maximum of two years if you are unable to work. Most insurance advisers recommend income protection policies that go for a lot longer than that.

In the case of TPD insurance, taking cover through your super fund can trigger unfortunate tax liabilities. The best TPD policies are ones that come with an "own occupation" definition, under which you are eligible for a payout if you are no longer able to perform your main line of work.

The alternative is an "any occupation" definition, where you would have to prove that you were incapable of performing any type of work before your claim was paid.

The problem within super funds is that payouts under an "any occupation" definition are actually taxed far more generously than those under an "own occupation" definition.

The lesson is that super can be a cheap way to insure yourself and family, as long as you are aware that there are limitations.