What is life cover buy back option insurance?

Buy back option insurance let you reinstate life cover if you've made a claim on a bundled TPD or trauma insurance policy.

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If you make a claim on either a TPD or trauma insurance policy that's attached to life cover, your life insurance will be reduced by the amount you've claimed. With a buy back option, you can pay to reinstate your life insurance to its original level of cover. That way, you don't risk leaving your loved ones behind with less than they need to get by.

How does the buy-back option work?

A buy-back option is added onto your life insurance policy as either a TPD or trauma policy.

If you have a bundled insurance policy with life insurance valued at $500,000 and trauma insurance valued at $100,000 and suffer a health problem that costs the amount of the trauma insurance, the remaining life insurance would total $400,000. If there was to be a claim for life insurance, the amount paid out at this point would be $400,000. However, if you have a buy-back option and 12 months pass, the life insurance would return to $500,000.

What types of buy-back options are available?

There are three types of buy-back options available.

  • TPD Buy-Back. A TPD buy-back is a standard buy-back option that allows you to reinstate the full amount of your insurance policy 12 months after a TPD claim. A TPD is total and permanent disablement.
  • Trauma Buy-Back. A trauma buy-back works in the same way as a TPD buy-back but is for a trauma such as heart attack or illness.
  • Trauma Reinstatement. Trauma reinstatement is an additional option that allows multiple claims to be made against a single trauma policy.

When is "buy back" available?

A life insurance buy-back option is usually available to policies that are bundled with either TPD or Trauma insurance. This is a common structure for life insurance policies as it lowers the cost of having separate insurances. It does mean however, that if you make a trauma or TPD claim, your life insurance benefit is reduced by the amount of that claim.

This is why insurers offer a buy back option.

Why should I consider including a buy-back option?

A buy-back option allows for a safety net for your family in case of illness and death.

If we go back to our earlier example, a claim of $100,000 will reduce the total insurance amount from $500,000 to $400,000. If you do not have a buy-back option, the coverage will stay at $400,000 and may not be suitable to cover your family’s needs in the event of death.

However, it is important to consider the design of a buy-back option and what it will cover. TDP will cover disablement and inability to work long-term, whereas trauma will cover illness and short-term health setbacks.

How does a buy-back option come in handy?

Consider a scenario where a person suffers a heart attack and is unable to work. The trauma insurance will cover the costs associated with the heart attack but will be deducted from the term life insurance amount.

A buy-back option is important because after 12 months the life insurance will be reinstated to the full amount, so if a life insurance claim is made the full amount will be paid. This is usually done without the need for underwriting or increases in premium.

Is there an additional cost to include a buy-back option in my policy?

Some insurers will include a buy-back option in their policy. Other insurers use a buy-back as an option to be bundled and in this case it will usually cost an additional amount. The amount varies and will require comparison between insurance companies.

As a standalone option not bundled with insurance, the buy-back option will generally cost more, however it offers flexibility when changing plans. As a bundled option, the buy-back policy will be included in the insurance premium.

What are some conditions that come with a buy-back option?

  • Some insurers will require underwriting and new premiums.
  • A buy-back policy will have an expiration date based off of age.
  • A buy-back may be partial or full depending on the terms.
  • A repurchased term insurance may not be eligible for indexation increases.
  • A buy-back may be dependent on health habits.
  • A buy-back may be based off “12 months” or “1 year” which can affect the repayment date.

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