Life insurance pays a set amount of money to a chosen beneficiary if you pass away.
While it mainly covers death, life insurance can offer cover for other things like; personal injury, income protection, and funerals.
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 is the main thing it covers, depending on the policy you choose, it can also cover things like temporary or permanent injury and trauma.
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. Many super funds offer different types of life insurance to members. 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 that 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) so you know what precisely is and isn't included in your cover.
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."
Christine Cupitt
CEO of the Council of Australian Life Insurers
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.
Beneficiary
The person you've nominated to receive your life insurance payment if you pass away or become terminally ill. You can nominate anyone as your beneficiary. There can be more than one beneficiary and each beneficiary can receive different amounts.
Children's insurance
Covers your child for death, terminal illness or a serious injury or illness that's specified in your policy. Typically, children's cover needs to be added as an optional extra.
Finder looked at 16 policies on our database and found just a few give you the option of adding a child to a policy.
Cooling-off period
The amount of time in which you can cancel your policy after signing up – and get a full refund of any premiums paid. The vast majority of insurers offer a cooling-off period of up to 30 days.
Counselling benefit
Some insurers will pay costs for grief counselling sessions for you or your partner. Counselling benefits usually have a limit of around $1,000. It can be claimed after a death or terminal illness claim.
Exclusion
An exclusion is any specific risk or event that you can't claim for under your policy. Insurers can apply exclusions to certain pre-existing medical conditions. For example, they may not cover any claims related to mental health.
Exclusion period
How long you'll have to hold your insurance before a policy exclusion turns into a claimable event. For example, it's common for suicide to have a 13-month exclusion period.
Fully underwritten
With a fully underwritten life insurance policy, your application is assessed upfront. Whereas a policy that isn't fully underwritten is assessed at the time of a claim.
Pays a lump sum benefit – usually up to $15,000 – so your loved ones can meet the cost of your burial or cremation without using their own money.
You could look for a funeral policy offering a guarantee that any payout won't be less than the total you've paid in premiums. This is sometimes called a premium guarantee.
Guaranteed acceptance
You can get insurance without having to answer any health questions, or take a medical exam or blood tests.
Guaranteed acceptance policies, also known as auto-acceptance policies, will have an age eligibility requirement. This can range between 16 and 80 years of age.
Guaranteed Renewability
The insurer lets you renew your coverage each year, as long as you keep paying for your premiums. Many life insurers in Australia offer this peace of mind.
Income protection insurance
Income protection insurance pays a monthly wage if you need to take time off work due to a sudden accident or illness. Many insurers will pay up to 70% of your pre-tax income.
Inflation protection
This ensures your premiums keep up with inflation so that your amount of cover is worth as much by tomorrow's dollar. You can ask your insurer to switch off this automatic policy feature, but it could leave you underinsured.
Interim accident cover
Insures you while your life insurance application is being underwritten or waiting to be approved. Typically, interim insurance will cover you for up to 90 days.
Joint life insurance
A policy that covers 2 people, but it pays out one time. A lump sum goes to the other policyholder in most cases.
Joint life insurance can be a cheaper option than two single policies. But it's potentially complicated if a relationship ends.
Level premium
Your insurance generally won't increase in price as you get older. You'll usually pay more in the beginning but they offer more certainty over time. Only a few direct insurers in Australia offer level premiums.
Loading
Essentially, you have to pay a bit more to include your health condition, job or hobby in your policy. Any loadings will be offered during the life insurance application process.
Minimum cover
The smallest amount of insurance (or, sum insured) you can take out. Many insurers in Australia set a minimum cover level of $100,000.
Maximum cover
The cover limit offered by an insurer. It's the most you can be paid out after a claim. Maximum cover limits can range from $500k to $25 million. TAL told Finder it had "no set limit" for a payout.
Maximum entry age
The maximum age you can be to apply for life insurance. Common age caps are 64 or 65, but some providers go up to 70+.
Some insurers will require you to have a physical examination before you're approved; others will just need you to answer questions about your medical history on your application form.
Monthly benefit
A regular monthly payment if you're unable to work due to illness or injury. It's designed to replace a portion of your regular income. Monthly benefits are a common feature of income protection policies.
Mortgage protection insurance
Insurance that can cover your mortgage repayments if you have a serious illness or pass away. Mortgage protection will only cover your mortgage repayments, not all the other bills you'd need to pay if you lost your ability to earn an income.
Personal accident insurance
Insurance to replace your income if you are temporarily unable to work after an accident. This cover can be bought as a standalone policy. Keep in mind it won't cover you if you get sick and can no longer work.
Personal insurance
An umbrella term for the following 4 core types of life cover: Life insurance, Total and permanent disability (TPD) insurance, trauma insurance and income protection cover.
A condition you have, or have had, prior to taking out life insurance.
You may be able to get life insurance that includes cover for a defined medical condition. It's likely to cost you more. However, if an insurer thinks your condition is too high risk or isn't under control, they'll exclude it from your policy.
Premiums
The amount you pay an insurer for your cover. Premiums can be paid weekly, fortnightly, monthly or annually.
A policy option that lets you stop paying premiums entirely. You will typically lose all your cover while your policy is suspended.
Not all life insurance policies include a suspension of cover benefit. Check with an insurer directly.
Premium freeze
A premium freeze lets you stop your premiums from increasing as you age.
It's only available with stepped premium policies because the cost rises with age. By activating a premium freeze, your level of cover will drop over time.
Retail life insurance
Buying life insurance through a broker, who will give you tailored advice on securing cover. Buying a retail policy is one of 3 ways to get life insurance in Australia. The others are directly with an insurer or through your superannuation.
Salary continuance
You can receive up to 75% of your regular earnings each month to cover general living expenses if you can't work due to an accident, illness or injury
Salary continuance insurance is held within a super fund, and you'll pay your insurance premiums from your super balance rather than directly from your bank account.
Typically, to be classed as a 'non-smoker' you'll need to be free of any smoking products for 12 months, but this can vary between insurers.
Stepped premiums
How much you pay for your policy increases each year by a certain percentage. Most policies in Australia have stepped premiums. Yearly increases can range from 2% to 7%.
Term cover
A type of life insurance that provides a set amount of cover for a set amount of time (or, 'term'). The maximum cover offered by term policiescan range from $100,000 to $1 million.
Terminal illness benefit
An insurance which pays out a lump sum if you're diagnosed with an illness which cannot be cured, such as advanced cancer. Benefits can range from around $1 million to as much as $25 million in Australia. It's usually included with a life cover policy.
Total and permanent disability (TPD)
An insurance that pays a lump-sum (as high as $5 million) if you get sick or injured and become permanently disabled. In most cases, TPD cover is available as an add-on when you take out life insurance.
Trauma insurance
A type of insurance that pays out if you are diagnosed with a critical illness or suffer a life-changing injury that's listed in your policy. Examples can include cancer, heart attack and stroke. Trauma insurance pays up to $2 million as a lump sum.
Underwriter
When you apply for cover, the insurance underwriter assesses your level of risk and determines whether the insurer should offer you cover, as well as under what conditions that cover should be offered.
You could check to see if a policy has been underwritten by a major insurer, backed by many years of experience.
FAQs
Somewhat — it depends on the context of its use. Life insurance generally refers to an insurance policy that pays a beneficiary out if you've passed away or have been diagnosed with a terminal illness. Death cover is a specific benefit in a life insurance policy that refers only to death Sometimes the terms are used interchangeably because life insurance so often refers to death cover.
'Life insurance' is also used as an umbrella term for the personal insurance category that includes things like income protection, TPD, and trauma cover.
This depends on your personal situation. If you have a partner or people who rely on you financially, life insurance can be helpful to cover their expenses or pay off any debts when you're gone. However, if you don't have a partner or dependents, taking out a life insurance policy might not be necessary.
Once your life insurance ends, your cover will simply expire. This means you won't be covered anymore in the case of death or any other benefits in your policy, and you'll have to think about buying another policy if you still want cover.
You can apply to extend the length of your policy before it ends, which is called a renewal. However, it's worth asking yourself whether you'll actually need further life insurance. Your circumstances and needs might have changed since you originally purchased your policy.
Cameron is the local insurance scholar at Finder. With a diverse background writing in independent education, web-3, and finance, his mission is to build helpful content and that speaks to readers in language they understand. See full bio
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