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Life Insurance Explained

Need a quick run-down on how life insurance actually works?

Life Insurance in Australia provides a lump sum benefit payment to nominated beneficiaries following the death of the policyholder.

This benefit ensures the people that depend on the insured financially have enough money to cover any outstanding debts or pay for future expenses that can no longer be covered by the policyholder. This benefit payment ensures that the policyholders loved ones are not placed under any kind of financial strain following their death.

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What types of life insurance can I get?

There are essentially four main types of life insurance to choose from in Australia. These can be purchased separately or bundled together under one policy.

  • Term Life Insurance. Provides a lump sum benefit following policy owner’s death or diagnosis of terminal illness.
  • Income Protection Insurance. Provides an ongoing replacement income of generally 75% of the person's income if they cannot work due to illness or injury.
  • Trauma Insurance. Provides a lump sum payment if the insured person suffers a serious illness or injury that is specified in their policy.
  • Total Permanent Disability. Provides a lump sum benefit payment if the insured becomes permanently disabled.

There are other types of insurance offering reduced levels of cover including accident only death insurance, accident only income cover and funeral insurance.

Common questions around how life insurance works

Payment and application

Payments can be made by direct debit, credit card or cheque to the insurer and most insurers will offer fortnightly, monthly, half-yearly or annual payment frequencies.

This will vary significantly from person to person and is dependent on the number of financial dependents you have and what would need to be covered in the event of your serious illness, injury or death. Common expenses to cover include mortgage or rent repayments, ongoing living expenses, outstanding debts and education.

This will depend on the type of insurance. Life cover will provide the payment to the policyholders nominated beneficiaries (or the policyholder if it has been paid under terminal illness). The benefit is generally paid to the policyholder for other types of cover who may then use it as they see fit.

The maximum sum-insured will vary between insurers with some limiting it to $1.5 million and others providing unlimited cover. Trauma insurance is generally limited to $2 million.


If you decide to cancel your life insurance, the insurer will not refund any of the premiums paid. This is because life insurance and income protection remains in force and provides cover for the period of time that has been paid for. Most policies will offer a cooling off period of about 30 days after the policy is activated where any premiums paid will be refunded if the person decides the policy is not for them.

Only you can cancel the policy. Life insurance companies can only cancel the policy if you do not pay your premiums or it is found that details provided in the application were fraudulent.


Most insurers will allow you to take out joint policies to cover your spouse and many will offer child cover options which enables you to insure your child for terminal illness or death to a maximum amount. There are some policies that will provide free child cover.

Whole of life insurance or universal life insurance as it is also known is no longer available in Australia. This type of cover has been replaced by what is known as term insurance, which provides cover for a determined period of time in return for fixed repayments. Once the policy period has expired, the policyholder must apply for a new policy or renew their cover. This may require a new round of medical underwriting.

There are no life insurance policies that offer a "guaranteed" payout at some point, as there's always the chance of cover lapsing or something else happening. Previously, return of premium (ROP) life insurance policies would return premiums paid after a certain amount of time if you survived the term, but these are no longer available in Australia, and often carried terms that meant they would not pay out.

Today, the closest thing to a "guaranteed" life insurance policy is one with no expiry age, meaning it will inevitably pay out someday, provided your cover is still active and no exclusions apply. Typical life insurance policies will often expire around age 90 or 95, but it is possible to get funeral insurance policies that do not have an expiry age. To make sure it's value for money, you may want to look for policies that have specific value options to help ensure you get your money's worth, and don't have any set expiry age.

How much does life insurance cost?

This will vary greatly between people and is determined by the level of risk that they present to the insurer. This risk will be reflected in the premium that is paid and is based on a number of factors including:

  • Age
  • Whether they smoke and how much alcohol they consume
  • Any health conditions
  • Occupation
  • Gender
  • How much you insure

Price is also determined by the sum that they insure and the policy they choose and its design. To provide an example of what one might pay for insurance, a 35-year-old male who works as an accountant and is looking to take out $500,000 in life cover might expect to pay around $370 per year. As stated previously this may vary greatly for different people.

How do I work out how much life insurance to take out?

This is a process of sitting down and creating a budgeting spreadsheet of all your financial obligations that would have to be covered if you were to pass away or no longer able to work. You may wish to use the calculators to help you determine this amount.

What is the difference between stepped and level premiums?

Life insurance premiums can be structured as either:

  • Stepped: Premiums increase over the life of the policy with the insured’s age.
  • Level: Premiums start off quite high but remain the same over the life of the policy.
  • Hybrid: Premiums start off on stepped basis but move to a level basis usually after 10 years.

How does life insurance work if you pass away?

In the event of the policy owner's death, the insurance provider will pay the benefit to their nominated beneficiaries. Policy owners or beneficiaries should contact the insurer immediately following death or disablement. Insurance companies should have claim documentation on their website. Below is a description of the stages of the life insurance claims process;

  • Insurer is notified of the claim: The policyholder or their beneficiary contact the insurance company with details of the claimants policy number and contact details, cause of death or disability, date that they ceased work if claiming income cover, nature of medical illness if claiming critical illness cover.
  • Claims forms sent to policy owner: The Insurance company will provide necessary claim forms to be completed by the claimant.
  • Claim form and necessary documentation returned: Claimant returns claim form and necessary supporting documentation. This may include death certificate, medical reports and financial documents.
  • Claim assessed: The insurance provider will assess the claim and all supporting documentation. This will usually take about 5 days.
  • Claim assessment decision: Claimant will be advised whether the claim has been accepted, declined or if further information is required. If it is an income protection claim the insurer will continue to review the eligibility of the claim each month.
    Payment of claim: Insurer makes claim payment by cheque. Ongoing payments are made by cheque or electronic funds transfer to the policyholders account.

How does life insurance work after a payout?

Following the lump sum payment of a benefit for life insurance trauma insurance or total and permanent disability insurance, the policy will cease to exist.

What about income protection?

Income protection insurance will continue to pay the benefit for the length of the benefit or when the worker returns to work. The insured worker can resume cover under the policy provided they continue to make premium payments. If the insured returns to work but are unable to work to the same capacity as they were previously, they may be able to file a claim for partial disability benefit. Some insurers will waive the waiting period if the insured filed another claim for the same disability that previously forced them to take time out of work. This is known as recurrent disability benefit.

What about Trauma and TPD that is linked to Life Insurance Policy

If there is a claim payment for TPD or Trauma cover that is bundled with a life insurance policy, the life cover sum-insured will be reduced by the benefit that has been paid. Most insurers will offer what is known as Trauma or TPD Buy Back benefit which enables the policy owner to repurchase the cover that was reduced following the Trauma or TPD benefit payment.

How does Life Insurance work as an investment?

The Australian life insurance industry used to offer investment linked life insurance or life assurance policy whereby the policyholder or their beneficiaries was entitled to receive a surrender value if the policy was terminated or the benefit was paid. These policies enabled the owners to invest a portion of the premium into an investment-linked account that would accumulate interest overtime and fluctuate with interest rates. Policyholders were able to borrow against the policy to fund the premium payments with the funds that had accumulated in the investment component of the policy.

How do life insurance beneficiaries work?

Each policy applicant will nominate the beneficiaries they wish to receive the benefit that is paid in the event of their death. This will usually be the policy applicant’s spouse or children but can really be anyone that is financially dependent on them. It is not unusual for applicants to nominate close friends or business partners as beneficiaries. Most insurers will require the beneficiary to be over 18 years of age. If the applicant does not nominate a beneficiary the funds will be distributed to their estate as lined out in their will.

What if I want to change my life insurance beneficiaries?

In the event that you want to change the nominated beneficiaries on your policy, you can contact the life insurance company and request the appropriate documentation to update the beneficiaries. This is usually found on the insurers website. It is also recommended that you contact your estate planner to notify them of the change.

So how does buying life insurance work?

If you are unsure of the policy you are after, you can fill out an enquiry form online to get in touch with an insurance provider to receive quotes and discuss different policy options. Listed below are the steps taken to purchase life insurance with an adviser.

  1. Make an enquiry online. Enter correct details to receive as accurate preliminary quote as possible.
  2. Contacted by adviser. An adviser will contact you to discuss your enquiry and possible policy options. There is no fee charged and absolutely no obligation to sign up for a policy.
  3. Compare policies. Compare different policy options that are suitable for your situation. Compare prices, benefits and features and policy exclusions. This information can be found in the Product Disclosure Statement.
  4. Submit your application. Once you have found a policy to suit your needs, you can now work with your adviser to submit all of the necessary application paperwork to the insurer.
  5. Application reviewed. Based on the details provided, the insurer will decide whether or not to provide you with cover and an appropriate premium. They may request further information including medical evidence or further details regarding your occupation.
  6. Policy accepted. Once the application is accepted, the insurer and insured will sign the policy contract of agreement and cover will be put in place.

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Coverage is the amount of money that you will be paid in the event of a claim. An insurance consultant can help you determine an appropriate amount. Calculator
Provides a lump sum payment if you become totally and permanently disabled and are unable to return to work.
Provides a lump sum payment if you suffer a serious medical condition. Cover can be taken out for 40-60 medical conditions depending on the policy you choose.
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Compare Life insurance quotes from these direct brands

Rates last updated November 20th, 2017
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Flexible cover options to suit your budget. New eligible customers can receive 25,000 Velocity Points. Ends 31 Nov. Min monthly premium and T&Cs apply.
Receive a discount of 10% on life insurance as a Woolworths Rewards Member. T's and C's apply.
Get flexible life insurance up to the sum of $2,000,000.
Get a refund of 10% of the premiums you've paid (in the first 12 months) with The Real Reward™ .
A simple life insurance product that can offer up to $1,500,000 in a lump sum payment on death or diagnosis of terminal illness.

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Richard Laycock

Richard is the insurance editor at He is on a mission to make insurance easier to understand.

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2 Responses

  1. Default Gravatar
    PatriciaJuly 23, 2017

    Several years ago I stopped paying my life insurance policy, what happens to the monies I have already paid

    • Default Gravatar
      JonathanJuly 23, 2017

      Hello Patricia,

      Thank you for sending your inquiry today. :)

      Some insurance companies have a grace period on which you can still have your plans reinstated (if it lapsed). It can vary from few months to few years. This is usually longer if you have paid unto your policy and earned significant amount of cash values or dividends to fund its own premium, or for those investment-linked policies where you bought large amount of units.

      Did you know that some policies have non forfeiture options such as paid-up or automatic premium loan? When you applied for a policy, your application form or adviser should have confirmed what to do if you’re unable to pay the premiums on time. With Paid-Up for example, what happens is they will use your accumulated cash values and dividends to settle the unpaid premiums on the same coverage period but with less face amount. For Automatic Premium Loan, the insurer will let you loan against the policies’ cash values to pay off your premium, which repayments will be later added towards your premium next statement.

      It will be recommended to consult with your adviser or insurer what is the status of your policy. If you still have an active policy with some cash values or dividends left, and you wish to surrender, you may qualify for a surrender cash value. Take note that this will be a significantly small gain as compared to the benefit you can still get should unexpected occurrences may happen, so it is important to weigh your options properly.

      Hope this helps.


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