People under 25 or with less than $6000 in their superannuation accounts will no longer be forced into compulsory life insurance.
Legislation passed parliament on Thursday making life insurance optional for people in those categories, with the exception of superannuation fund members working in dangerous jobs.
Xavier O'Halloran of consumer group Choice said it would end the blunt one-size-fits-all approach to insurance in super.
"Millions will flow back into the hands of people rather than being eaten away by insurance premiums for policies people didn't want, need, or even know they had," he said.
The changes will take effect in April next year after the government accepted amendments to its bill.
Financial Services Council chief executive Sally Loane said the changes were sensible and consumer-focused.
"These changes will ensure that super funds have additional time to engage with their members about the changes, and that consumers will have time to make informed decisions about their insurance needs," she said.
The government amended the bill in the Senate to allow for the exception of superannuation fund members working dangerous jobs.
The change mirrored amendments that Labor's financial services spokesman Stephen Jones had attempted in the lower house, which had been voted down earlier this week.
There were about 475,000 young workers in high-risk jobs, he added.
"It's not a trivial issue, over 103 workers have lost their lives this year alone. Life insurance provides a benefit to their dependents," he told the chamber on Thursday.
Mr Jones argued the government's changes wouldn't work properly as trustees didn't have enough information about the occupational risk of members' jobs.
Workers were only legally required to provide minimal information about their jobs, he said.
But his attempt to amend the bill further failed, with the lower house only ticking off the Senate's changes.
The extra amendment would have allowed trustees to make decisions on workers' default life cover on their "reasonable belief", which was enough for them to make a call, he argued.
Mr Jones said it would give trustees and superannuation funds protection from adverse decisions, describing the amendment as sensible and practical.
The Australian Council of Trade Unions fears 1.9 million young workers will be worse off now that they have to opt in to insurance.
"Reforming super to follow workers from job to job remains a better solution to the problem this bill sets out to address, and it is disappointing that the Morrison government instead decided to rip insurance from millions of workers," ACTU said.
Australian Associated Press