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Defunct types of life insurance
Discover the types of life insurance that are no longer sold in Australia.
Insurance has changed a lot in Australia over the past few decades, and a bunch of plans you used to be able to buy are no longer available. With the introduction of compulsory superannuation and the growing popularity of term life insurance, many older offerings have been judged too inflexible or unwieldy and been scrapped.
We outline these older, defunct life insurance plans below, and go over what's replaced them.
Permanent life insurance
As the name implies, permanent life insurance plans were intended to cover someone for their entire life. Permanent insurance plans came in several different flavours, but they all shared a few common factors:
- Lifelong protection. As stated, permanent life insurance would last as long as you did. There was no need to renew or renegotiate the terms of your policy.
- Cash value. A portion of the premium paid would go towards investments that would build up a cash value over the policy's lifetime. Typically, you would be able to access that money directly after a certain length of time.
- Collateral against loans. The cash value wasn't only available for spending but could actually be used as a guarantee for a loan or mortgage.
Three different types of permanent life insurance were available: whole life, universal and variable universal. Policies with the above qualities are collectively known as "life assurance" policies.
As with other permanent life insurance policies, some of the premium paid would go toward insurance cover while the rest would be placed in safe, low-interest investments. The purchaser would have no control over what investments were chosen but would be able to access the cash value at retirement.
With universal life insurance, part of your premium would go towards insurance benefits while the rest was invested. You would also get a cash payout. The big difference for permanent universal plans was their flexibility: you could raise or lower the benefit amount throughout the duration of the policy and change the size and frequency of the premiums you pay. This would allow you to pay less when money was tight and make it up at other times.
Variable universal life insurance differs from the other two in that you had the ability to choose your investments. It was an inherently riskier system: if you invested wisely and got lucky, you could see the value of your policy skyrocket, but if you got unlucky, you might lose out big time. Like all permanent life insurance, a certain part of your paid premiums would go towards insurance benefits.
Why is permanent life insurance no longer available?
Permanent life insurance hung around for quite a few years, but it was ultimately removed from the Australian insurance market for a few reasons.
First, the fixed payout you would receive didn't scale with inflation, meaning that the premium you were expecting when you bought the policy may be worth significantly less by the time you accessed it. On top of this, the fixed-rate investments tended to have a very low yield, barely raising the value of the policy over time and comparing poorly to simply investing the money in a savings account with a bank instead.
Whole life insurance in particular was intended as a retirement benefit and was generally superseded by mandatory superannuation.
Perhaps the biggest issue with permanent life insurance plans was their initial cost. Because they would last for the majority of the policyholder's life, the initial premiums were extremely steep and nearly unaffordable for many.
What has replaced permanent life insurance?
Permanent life insurance has been replaced by term life insurance, which offers lower premiums and a large degree of flexibility in terms of features and payments, but lasts for a much shorter period of time. Unlike permanent life insurance, term life insurance cannot be redeemed for a cash payment because it doesn't have a cash value component.
ROP life insurance
ROP or "return of premium" life insurance is a type of policy where you receive your premiums back if you survive the entire length of the policy. The idea was that some of your premiums would be invested in small-interest investments, and you would be able to get a lump-sum payout either in a period of illness or when the policy expired.
ROP life insurance (also known as "endowment insurance") was different from permanent life insurance plans because the term of the policy was much shorter.
Why is ROP life insurance no longer available?
ROP plans suffered from the same issues as permanent policies, namely poor interest on the investments and inflexibility for both premiums and payouts. ROP premiums were also much, much higher than the term life insurance plans that have replaced them.
Can I sell my life insurance policy?
You can no longer sell your policy in Australia. In the past, you had the option of selling your life insurance policy if, for example, you felt that you no longer needed the cover, had debt or other obligations to pay off or could no longer afford premium payments. In this case, the insurance company would become the owner of your policy, continue to pay the premiums and receive the payout if you died.
With the advent of term life insurance policies, selling policies is no longer an option because of the policies' shorter lifespans as well as increased competition thanks to being easily able to obtain policy quotes online.
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