What is life insurance?
Life insurance protects your family from life’s uncertainties. If something unexpected happens, it can help cover existing and future expenses.
Key takeaways
- Life insurance pays a set amount of money to a chosen beneficiary if you pass away.
- More than 70% of life insurance benefits are paid to living customers to help them manage the financial impact of personality disability or interrupted employment income.
- How much life insurance you need will depend on your income, debts, future costs, and how much your family would need to live comfortably.
What is life insurance?
Life insurance is a type of insurance that pays money to a beneficiary - a person or entity of your choosing - when you pass away or, in some cases, are diagnosed with a terminal illness or disability.
You or a beneficiary will receive a lump sum or regular payments of an amount you agree upon with an insurer, all in exchange for the premiums you pay.
Life insurance is designed to help them cover any current or future expenses like mortgage payments & funeral costs, as well as maintain their lifestyle during a tough time.
While death cover is what life insurance is known, depending on the policy you choose, it can also cover things like temporary or permanent injury, trauma, and funeral expenses.
There are three main ways to get life insurance in Australia:
- Through an insurer. You can buy life insurance directly through a life insurer, either online or over the phone.
- Via a broker. Going through a broker can help you better understand your options and find a policy tailored to your personal circumstances. This might be better for someone with more complex needs, like a pre-existing condition.
- With your superannuation fund. All super funds offer life and total & permanent disability cover, while some will also offer income protection. Sometimes, these can be automatically provided if you're part of an employer super fund and are generally cheaper than policies bought outside of super. Beware, though, these are typically less comprehensive.
What does life insurance cover?
The main thing life insurance offers is death cover. However, in Australia, providers offer 6 types of insurance under the term "life insurance." You can choose which types of protection you want included in your policy. Choosing more cover will make your policy more expensive but can also bring that extra peace of mind.
Life/Death cover: Pays out a lump sum or instalments to a beneficiary in the event of your death and, in some cases, if you're diagnosed with a terminal illness. This is crucial if there are individuals who rely on you financially, particularly if you have a mortgage or other debts to pay off.
Income protection: This helps you protect one of your biggest assets – the ability to earn income and pay bills. You can get up to 85% of your salary if you can't work due to illness or injury. Most policies will have a minimum waiting period before you're eligible for your benefits, which can range from a few weeks up to a couple of years.
Trauma insurance: You get a lump sum to pay for any rehabilitation or treatment if you've experienced a medical trauma. Every policy will describe medical trauma differently, but some of the usual events include heart attack and stroke. Unlike many other policy types, you can make multiple claims in your lifetime. That's because certain trauma policies will let you reinstate your policy after a successful claim. Generally, you won't be able to make a claim for the same condition twice.
Total and permanent disability insurance (TPD): If you become totally or permanently disabled, you'll receive a lump sum payment. This money can help pay off debts and medical expenses and replace lost income. How each insurer defines total and permanent disability can vary, but it usually means that an illness or injury has left you unable to work indefinitely.
Personal accident insurance: Provides either a lump sum or monthly benefit if you're injured in an accident and cannot work. The main ways it's different from income protection insurance is in the level of coverage you get and how you're paid. Personal accident insurance generally has a maximum benefit period of up to 5 years, while income protection policies cover you for a specified period which can be usually extended till you're 65. Personal accident insurance will also pay you out lump sums rather than instalments.
Funeral: Pays out a lump sum to your family when you die, which they can use towards the cost of your funeral. You'll pay regular premiums for a predefined amount of coverage, typically ranging from $5000 to $15,000 of cover. This can add up over time and can exceed the cost of a funeral if you're not careful.
Life insurance policy benefits
Each life insurance plan has a unique list of benefits and coverage options. Here are a few items that most Australian policies cover:
Life insurance policy
- Death benefit
- Terminal illness benefit
Optional extras
- Total and permanent disability (TPD cover) cover
- Trauma cover
- Child cover
- Income protection cover
- Personal accident
- Funeral benefit
- Inflation protection
You don’t always need a life insurance policy to get extras like TPD cover, trauma cover, and income protection. Many insurers let you buy these as standalone policies. If you’re only interested in something like TPD cover, be sure to ask a provider if they offer it separately so you can avoid paying for extras or a whole policy you don’t need.
What does life insurance not cover?
While every policy has its own list of exclusions, here are a few common ones you'll see:
- Suicide or self-harm causing death within the first couple of years of the policy.
- Some insurers exclude or restrict certain pre-existing medical conditions.
- Deaths involving criminal activity.
- Deaths in countries with travel warnings, if specified in the policy.
- Certain dangerous activities or acts of war.
- Recklessness or personal negligence.
Remember that what is excluded for death cover can be different from the list of exclusions that apply to optional benefits like income protection and TPD cover. It's always a good idea to check a policy's product disclosure statement (PDS) and Target Market Determination (TPD), so you know what precisely is included and included in your policy as well as if it's that's right for you.
What to look for in a life insurance policy
When comparing life insurance, here are the key things to look out for in a policy:
Maximum Entry Age – It's good to start by checking the maximum age. This helps you understand, at the very least, if you're eligible for that policy.
Premium structure – Check whether the policy has 'level' or 'stepped premiums', or if the insurer lets you choose. Stepped premiums will go will go up every year you get older, which can make a big difference if you plan to hold a life insurance policy for a long time. Level premiums on the other hand, stay the same for the life on the policy. This means the cost starts out higher than stepped premiums, but depending on how long you hold your policy, the cost may be lower at some point in the future.
Benefit structure – Look at the benefits and how they're designed. Does it have both death and terminal illness included? Another thing to note is If a policy has indexed benefits, which increases your benefit amount with inflation. In the long run it can be a significant difference in what you can claim.
Optional extras — Not all policies offer funeral, TPD, and trauma cover as optional extras. These can be crucial if you're looking to safeguard against a range of uncertain events.
Cover limit - See what the maximum benefit is and whether it meets the needs of you and your family. You can then weigh it with the cost of the premiums for that policy.
Waiting periods — Knowing the minimum waiting period and maximum benefit period is crucial, as they tell you when your cover kicks in and how long it will last.
Understanding these factors will help you find a policy that suits your needs and budget. A qualified broker or financial advisor can also help you find the right policy if you’re uncertain.
What to consider before buying life insurance
If you're considering buying life insurance, it's good to ask yourself a few questions before taking out a policy.
- How do you want to be insured? Consider whether it makes more sense directly from an insurer or as part of your superannuation. Each option has its perks – direct can be straightforward, brokers offer a wider selection with professional advice, and super might be convenient and cost-effective, though usually with less cover.
- Do you want a fully underwritten policy? A fully underwritten life insurance policy might require you to take a medical exam or answer detailed health questions. It can take longer to get cover, and you'll have to provide much more information about your health and lifestyle. Still, it often results in more tailored cover and potentially lower premiums. If you're in good health, this could be a smart move.
- How much cover do you want? Think about your family's financial needs if you're no longer around. Are they able to manage living expenses, debts, or future goals like saving for retirement? Calculating these can help you decide on the right amount of cover in your policy.
- What is your medical history? This can make a big impact on what types of insurance you can get and how much you'll pay for it. Insurers will often exclude pre-existing medical conditions from different life insurance policies, which can lead to higher premiums if it's a significant risk factor for things like injury or death. In some cases this can also mean you're ineligible for cover.
If you’re unsure about your decision or need advice on what to look for, it’s always good to speak to a financial adviser or insurance broker.
Expert insight
"Around 15 million Australians have life insurance, and the majority get it through their superannuation. This commonly provides people with default cover where there's no underwriting process. Through their superannuation, Australians have long been able to get access to affordable life insurance cover that is meaningful to them without worrying about their eligibility."
Life insurance terminology
Diving into insurance can get tricky, especially when there's new jargon and words to learn left and right. Here's a breakdown of the most common terms in life insurance.
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