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What is term life insurance?
Term life insurance is a type of life insurance that provides a set amount of cover for a set amount of time (or, 'term'). It can protect your family or anyone else who's financially dependent on you if you pass away or are diagnosed with a terminal illness, before what's known as the policy's expiry age. Term life insurance can help your family pay debts and ongoing payments, such as a mortgage, if you're no longer around.
There is no cash payout or 'surrender cash value' in term life insurance. You pay a premium to have cover in place. If the term ends or you cancel your policy, you won't receive payment.
Pros and cons of term life insurance
Pros
It offers a lump sum payout. Your benefit's paid in one go, meaning your family has flexibilty with how they can use the money. It could be used to pay off debts such as the mortgage or credit cards. Or to maintain your family's lifestyle, such as your children's education costs.
You can be paid out if you get a terminal illness. If a medical practitioner expects you to die within 12 months, your policy can pay out the benefit as an advance payment. A terminal illness payment can help with medical bills, funeral costs or even as a cash gift.
Your policy can be renewed each year. Most policies can be renewed until you reach the age of 99, if necessary.
Policies can be straightforward. Exclusions are fairly limited with term life insurance. One common exclusion is a passing from suicide in the first 13 months of a policy. Otherwise, your family will usually be able to rely on a cash payout if you die during the policy term.
Cons
There's no benefit once the term ends. If you outlive your term insurance policy, it'll expire. Your beneficiaries won't receive any cash out or death benefit. (It's a key reason why term life insurance is competitively priced.)
Regular renewals and rising costs. Term life insurance is not a 'set and forget' insurance product. As a policy is only valid for the term you've chosen, when the policy expires at the end of that term you need to take out a new policy if you want to continue to be covered. At the end of the term, you're older than you were when you first applied, it could well make finding a new policy more expensive.
Your premium will directly reflect your lifestyle. Your premiums will be based on the level of risk you present to your insurer. If you smoke, engage in high-risk activities or work in a dangerous occupation, you can expect to pay more than others.
How much does term life insurance cost?
Below is a quick view of how much life insurance could cost you, per month.
*Prices are an estimate based on a 35 year old non-smoking male office worker. Quotes last checked on September 2021 and are subject to change.
When is a good time to take out cover?
This will really depend on your own situation and what you would need to cover in the event of your death.
Some key triggers that lead people to take out cover or review their existing cover include buying a house, getting married and having their first child.
Building Wealth
18-25
25-35
35-45
Starting career
Start accumulating wealth
No dependents
No mortgage
Few financial commitments
Active lifestyle
Increase in earnings
Career development
Long term debt with mortgage
Possible short-term debt
Marriage and children
Increase in earnings
Career development
Mortgage decreasing
Saving for retirement
Securing retirement
45-55
55-65
Maximising earnings
Preparing for retirement
Less concern around financial security
Less long-term debt
Fewer financial commitment as children start to move out
Focus on other investments
Protecting wealth accumulated
Income decreases
Focus on investments
Finance lifestyle with savings
The maximum entry age may also change based on the type of premium you choose and how much cover you apply for.
Are there any add-ons I should consider for term life insurance?
There are a number of extra features you can add to your term life insurance policy to tailor it to your needs, and so you may want to consider:
Accidental death benefit. Will pay an additional amount above your coverage amount if your death is the result of an accident.
Children's term life insurance. Can pay a death benefit for each of your children covered under your policy in the event of their death. You can usually add insurance for your child for around $10,000 and $20,000, based on their age and other eligibility requirements.
Total permanent disablement. Will make sure your premiums are paid for you if you become totally disabled. There are often age and coverage restrictions that apply.
Accelerated death benefit. Will make an advance payment of part of your benefit amount if you are diagnosed with a terminal illness.
Term life insurance pays a lump sum to your beneficiaries if you're diagnosed with a terminal illness or die while your policy's active. It'll only cover you for a set amount of time – typically, 20 years.
It depends. Most life insurance companies will require you complete a short medical questionnaire when applying for cover. If you meet their entry requirements, you will usually be able to apply for cover without having to undertake a medical exam.
However, if your medical history show complications, an insurer may need to investigate further and this can include medical tests.
The amount you pay for cover will depend on a number of factors including;
Your age - the older you are the more you will pay
Your occupation - higher risk occupation may mean you pay a higher premium
Whether you smoke - smokers are considered higher risk and will pay a higher premium
Gender - rates vary between genders at different ages
Pre-existing medical conditions - will depend on the nature of condition and current treatment
No. Insurance companies in Australia no longer offer "whole of life" or universal life insurance. This type of cover was popular in past decades, but has now been replaced by term life insurance.
Term life insurance can also be combined with other types of life cover such as TPD Insurance, which provides a lump sum payment if you become permanently disabled and can no longer work.
Most super funds will provide a very basic level of cover life insurance to members. This is usually only a portion of what will actually be required to cover all of your debts/ongoing expenses of your family if you were to pass away. However, may wish to speak with a financial adviser to get a better idea of what is best for your situation.
Broadly, you may want to take out enough to cover expected final expenses:
Medical bills
Estate planning costs
Funeral costs
Plus, the living expenses for your dependents
Loan repayments for the house and car
Credit card repayments
Any other ongoing expenses in your household
Term life insurance can be a great option if you're looking for peace of mind at times of high financial commitment. With this in mind, it's worth considering;
When your mortgage will be at its greatest
How long you want to cover your spouse for in the event of your death
When your children’s needs will be the highest
When your household income may be impacted because one parent is staying at home or working less to take care of the children
Most insurers will require details of:
Your health
Income
Occupation
Residency
Lifestyle/hobbies
Travel information
This helps the insurer assess whether you are eligible for cover, any exclusions they will need to apply to the policy and how much you should pay for cover.
The cooling-off period is the time at the start of your policy (often, 30 days) where you can cancel your policy and receive a refund of any payment that has been made.
Applications are generally available to:
Australian citizens
Permanent residents of Australia
Most insurers will allow you to apply for life insurance up to age 75, with some insurers offering cover to age 80.
At the end of the term, you have chosen for your cover you will have the option to renew your policy on an annual basis without being asked any medical or lifestyle questions, or undergoing a medical test. However, if you choose this option you may be paying higher premiums as the insurer cannot confirm your level of risk.
In other cases, a term life insurance policy may have an option to roll over into a whole of life policy, which can then cover you until retirement or your death. Typically you will have a set period of time in which to convert your policy – dictated by each different insurer – and you won’t have to provide any new information about your health or lifestyle if you keep the benefits of the policy the same.
Premiums will increase with age under a stepped premium arrangement. By choosing a level premium, you can lock in your premium (keep in mind, it does increase with CPI). Level premiums shouldn't change unless you amend your policy or you've reached a certain age (often 65).
During the application process, you can change and adjust the variables of your policy until you are happy with the final product. During the term of your insurance policy you may have the opportunity to change your coverage amount or your term of coverage at specific intervals during the term, often every two years.
Yes. Most insurers offer Guaranteed Future Insurability which allows you to increase the level of cover of your policy without having to provide any further medical evidence or proof of insurability following certain personal events including:
Marriage
Divorce
Death of spouse
Birth or adoption of child
Your child begins tertiary education
You purchase a new home and take out a mortgage
If you want to increase the level of cover of your policy without a personal event having occurred, you may be required to undertake additional medical tests.
Yes. You can update your beneficiaries by contacting your insurer and add/remove those listed on your policy.
It’s worth reviewing your policy every 12 months to account for any changes to your situation.
James Martin was the insurance editor at Finder. He has written on a range of insurance and finance topics for over 7 years. James often shares his insurance expertise as a media spokesperson and has appeared on Prime 7 News, WIN News, Insurance News, 7NEWS and The Guardian. He holds a Tier 1 General Insurance (General Advice) certification and a Tier 1 Generic Knowledge certification, both of which meet the requirements of ASIC Regulatory Guide 146 (RG146). See full bio
James's expertise
James has written 219 Finder guides across topics including:
Richard Laycock is Finder’s insights editor after spending the last five years writing and editing articles about insurance. His musings can be found across the web including on MoneyMag, Yahoo Finance and Travel Weekly. Richard studied Media at Macquarie University and The Missouri School of Journalism and has a Tier 1 Certification in General Advice for Life Insurance. See full bio
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