Looking for a new life cover policy or to review your existing cover?
Life cover offers a lump sum payment to your beneficiaries in the event of your death. Most policies have a clause whereby the benefits will be paid if you do not pass away but are diagnosed with a critical illness and given no longer than 12 months to live by a certified medical practitioner.
Key benefits of life insurance
- Critical financial support for your loved ones for immediate and future expenses following unexpected death
- Can be funded through superannuation
- Can be bundled with other types of cover including TPD and Trauma to give you the right level of cover from injury and illness
Life Insurance Explained: A Video Guide
Young and Single
Young and single people are often beginning full-time employment and may begin to accumulate some small personal debt. Most of us, especially when we are young, tend to believe that 'it won't happen to me'. We think we are too young to get cancer or suffer from a heart attack. The reality is young people do suffer the same as anybody else and if something should go wrong it is a nice feeling to know that your passing will not leave financial burden for those you leave behind. It's important for people of this age group to consider what may happen if they were no longer able to work due to serious injury or illness. The ongoing benefit of an income protection policy could go a long way in helping ensure they are able to maintain their current standard of living and keep on top of rent, mortgage and any other personal debt if forced out of work for a period of time.
Young couples are often at a critical stage in their lives as they begin to acquire more debt as they set themselves up for the future. When building a relationship it is often built around acquiring a home of your own and putting down the foundations for a solid financial future. It is an exciting time in your life as you work your way towards your goals with a partner while also trying to enjoy your time out of work and start looking to raise a family. Even though you may be young, devastating events can still occur and if they do, the last thing you want is to leave your partner with both grief and financial stress after your passing. The payout from a life insurance policy can go an extremely long way in helping cover day to day living expenses, short-term debt and mortgage repayments.
Young families have much to lose if one of the parents were to suddenly pass away, leaving the surviving parent with the daunting task of raising a family while trying to earn a living at the same time. You will no doubt be thinking about what you are providing for your family at present as well as what the situation will be in the future: education for your children, an adequate home, ability to pay for day to day living expenses. While it is never a pleasant thought, the payout from a policy can offer great relief to these expenses if the main breadwinner is no longer there to provide for the family.
Maturing families look towards building assets and growing income to provide options and financial security for the future and retirement. No one plans to get sick, injured or to die prematurely but it does happen. Your household income has probably peaked by now and the kids are leaving home to start their own lives. Your interests start changing to that of being prepared for your retirement when it arrives. This can also be a time where you are more susceptible to suffering a medical condition that requires ongoing treatment.
Retirees with an empty nest may not have the same level of financial obligations it is important to remember the lifestyle you now have deserves protecting and the loss of one partner could still put a strain on the surviving partner to be able to retain that lifestyle. There still may be some final expenses that would need to be covered in the event of your death such as funeral costs, legal costs, estate planning costs and any remaining small personal debt.Back to top
There are a variety of insurance policies that provide the policyholder with a benefit on death or disability within a defined period of time
|Insurance Type||Key Benefit|
|Term Life Cover||Provides a lump-sum benefit to cover the event of death within a defined period. Most term insurance policies will also provide payment if the policyholder is diagnosed with a terminal illness with less than 12 months to live.|
|Income Protection Insurance||Provides an ongoing monthly benefit if the insured is forced to take time out of work due to serious illness or injury. This benefit is usually 75% of the regular income though some brands will provide a benefit of up to 90% of the regular income if this additional portion is contributed to the policyholders superannuation fund.|
|TPD Insurance||Provides a benefit (usually lump-sum) if the insured becomes totally disabled as defined by their policy. TPD Insurance can be bundled with ones life cover or purchased separately.|
|Trauma Insurance||Provides benefit if policyholder suffers a trauma condition specified by the insurance provider. This could include cancer, heart attack, stroke and organ transplant. Trauma Insurance can be bundled with ones life cover or purchased separately.|
What Life Stages are Different Types of Life Insurance Policies Typically Suited Towards?
- Provide an agreed benefit upon death or diagnosis of terminal illness of insured person.
- Terminal illness benefit will pay an advance of up to 100% of the death cover if it is deemed the insured person has less than 12 months to live.
- The policy needs to be renewed at the end of each term to keep your policy active and your cover available.
- Premiums can increase with the policyholders age and can also increase in line with the Consumer Price Index.
- Is ideal to cover high risk times in your life such as when your children are young or your mortgage is high.
- Can be expensive to re-apply at the end of each term as age and your risk factors increase.
Why is Whole Life Insurance No Longer Offered in Australia?
Despite whole of life insurance policies previously making up a great portion of life insurance companies business in the past, the last 30 years has seen a dramatic shift away from these policies. What are the underlying reasons for this?
- Inflation: Benefit received at policy maturity is severely reduced by the rate of inflation and not reflective of the original purpose of a payment to fund retirement. As an example, an annual inflation rate of six percent per-annum would mean the benefit would have halved every 12 years.
- Fixed Interest Securities: Investment of whole of life policies were fixed interest securities and did not perform well during increases in inflation and interest rates.
- Commissions and Other Expenses: Fees involved in setting up a whole of life policy could often equate to as much as two years in premiums, further removing from any cash-value that these offered in the early years of the policy.
Life Insurance for Personal and Business Protection
The benefits of life insurance extend far beyond covering death cover for individuals and their families. Life Insurance can also be taken out by businesses to ensure give financial security in the event their key workers or directors pass away. Personal Applications of Term Life Insurance
- Mortgage Protection: Provides coverage for the loan balance of a mortgage in the event of something happening to the mortgage holder. This can ensure that the home does not need to be sold in the event of premature death or disablement of the mortgage holder(s).
- Estate Protection: Ensures that sufficient funds are available for equal distribution of an estate in the event of the policyholders death. This ensures the estate is protected from potential challengers to how the estate is divided.
- Family Protection: Ensures there are sufficient funds to maintain the family's standard of living by covering day to day living expenses into the future.
- Debt Protection: Will ensure both there is sufficient funds to pay for both long and short term debts.
Business Applications of Term Life Insurance
- Key Person Protection: Provides compensation to a business in the event of one of their key employees passing away.
- Partnership Protection/Buy-Sell Agreements: Provides funds to purchase a deceased business partners share in the business.
It is a sad fact that Australia is currently facing a massive underinsurance problem with research commissioned by IFSA in 2009 indicating that over 95% of Australian families with dependents were underinsured¹. Many people are quick to insure either their car or home but finding adequate cover to protect the greatest asset of all is often neglected. The first step to take when assessing if you should take out coverage is to consider what the most important assets are in life and consider the financial stress that would be caused if you were suddenly no longer able to work or were no longer around to provide a steady flow of income to your family. Whether it be the birth of your first child or the purchase of your first home with your spouse, the moment that others become financially dependent on you is the moment you should consider taking out life cover.
Significant Life Events That May Lead To Taking Out Life Insurance
- Getting married
- Purchase or upgrade of a new home
- Application for a home loan/taking out a mortgage
- Birth of your first child
- Change in your personal health
Common Features and Benefits of Life Insurance Policies
- Indexation of Sum Insured: In order to keep pace with inflation, most insurance companies enable policy owners to increase the sum insured by the increase in the Consumer Price Index on the policies annual anniversary without having to provide any further medical underwriting. In most cases this increase is automatic unless the policyholder requests otherwise.
- Financial Planning Benefit: Provides the policyholder or beneficiary/ies with a lump sum payment to help cover the costs of receiving a financial plan from a certified financial adviser if the insured person is to pass away or be diagnosed with a terminal illness. In most cases this financial provider will have to be pre-approved by the insurance provider.
- Final/Funeral Expenses Benefit: Provides an advanced payment to the beneficiary/ies or policy owner to assist with the immediate financial expenses following the insured's death.
- Guaranteed Future Insurability: Provides the policyholder with the ability to purchase additional insurance cover at a nominated date or on the occurrence of a specified event without having to provide further medical underwriting. This option is often only able to be used after a certain period of time with a limit on the number of increases over the life of the policy.
- Complimentary Interim Accidental Death Cover: Provides death cover to the insured from the date insurance certificate is issued usually until 90 days after the application has been signed or until the policy is issued by the provider.
Optional Benefits that May Be Worth Considering
In addition to the common features of a life insurance policy, policyholders often have the ability to add additional benefits and features to tailor the policy closer to their needs. These "Riders" are often available at an additional cost.
- Total and Permanent Disablement Benefit: Offers a lump sum payment to the life insured if they become totally and permanently disabled. Policyholders should be aware that in the event of a TPD benefit payment the sum insured for the life cover benefit will in most cases be reduced by any amount payable. There may also be a limit to the amount of TPD cover that be taken out for a term insurance policy.
- Total and Permanent Disablement Buy Back: Enables the policyholder or a trustee on their behalf to repurchase the life cover that was reduced when a Total and Permanent Disablement claim was paid.
- Trauma Benefit: Offers a lump sum payment if the insured suffers ones of the trauma conditions specified by in their policy. This may include cancer, heart attack, stroke. If a Trauma benefit is paid, the term insurance insured is usually reduced by the amount of benefit paid.
- Trauma Benefit Buy Back: As with a TPD Buy Back, a Trauma Benefit Buy Back enables the policyholder to reinstate the cover that was reduced in their term insurance policy as a result of payment for trauma benefit.
- Stand alone and Linked Insurance Policies: As mentioned before if a Trauma or TPD benefit is added to a term insurance policy, the payment of either will reduce the sum insured if the policies are "linked". However some companies will provide policyholders to purchase these benefits as "stand-alone" cover, meaning that the payment of this additional benefit will not affect the sum insured for the death cover.
- Premium Freeze: Enables the policyholder to lock the premiums into the same rate. If this option is exercised the cover will reduce to an amount that can be purchased with the nominated premium.
- Family Protection: Family protection provides a lump sum payment in the event that the policyholder's child is diagnosed with a serious illness specified by the insurance provider. The policyholder is often able to purchase this benefit for multiple children but there is often a maximum benefit that will be paid per child.
- Waiver of Premium: Enables policyholders to waive premium payments in the event of specified events occurring. Such events may include pregnancy, involuntary unemployment and sabbatical.
- Needlestick Injury: Specifically designed for individuals in the medical and allied occupations (e.g doctors, nurses, dentists) and will pay a lump sum benefit if the policyholder becomes infected with occupationally acquired Human Immunodeficiency Virus, Hepatitis B or Hepatitis C as a result of an accident whilst working in their normal occupation.
Policy Feature Conditions May Vary
The descriptions for built-in benefits and features listed above should only be viewed as broad summaries. Each policy will often contain its own set of requirements for the policyholder to be able to add a feature to their policy and the conditions for a claim being paid.
Child Cover and Life Insurance For Your Spouse
Some insurance brands will allow you to add your children to your own policy for free, while others will apply a separate cost. So what should you be looking for in a Children's Life Insurance policy – after all, your children don't have bills or debts to cover, or dependents of their own, so what is the benefit of taking out Child Cover? Children's Cover can provide support if:
- Your child suffers a traumatic event. Each brand will have a different set of events for which your child can be covered, but if you make an eligible claim after your child suffers a traumatic event, you can receive a lump sum benefit amount to help you pay for medical costs and other related expenses.
- Your child contracts a terminal illness. If your child is diagnosed with a terminal illness, you can receive a payout to help you cover any associated costs.
- The death of your child. If your child dies there may not be a lot of unpaid debts to be accountable for, but there will still be final expenses which can be covered by a children's cover policy.
- You don't have to pay extra premiums for your child's cover. Where a children's life insurance policy is included with your own life insurance, you don't have to pay additional premiums for their cover, only for your own.
When considering children's life insurance, you can generally choose:
- Benefit amounts from $10,000 to $200,000.
- To cover children from two years old and over till age twenty one.
- To cover more than one child. This will give a lump sum benefit for each individual child at claim time.
- There is also the option to take out a blanket coverage that will provide only one benefit should a child become ill. If another child becomes ill in the future, the policyholder will not be able to make another claim.
Events and illnesses which are typically covered by children's life insurance can include:
- Benign tumour of the spine with impairment
- Brain damage
- Benign tumour of the brain with impairment
- Chronic kidney (renal) failure
- Intensive care
- Intensive care
- Loss of limbs or sight
- Loss of speech
- Major head trauma
- Major organ transplant
Some additional benefits of child cover include:
- Convert the cover to an adult policy. It is ideal to take out life insurance as early as possible, because you will generally be in better health and have fewer risk factors to drive up the cost of your cover. However, by the time most adults think about life insurance, they are already developing their own risks surrounding health, work stress and lifestyle habits. However, if you cover your children on your policy, in most cases they can be guaranteed insurability and have their policy converted to an adult policy and save.
- Cover for time off. Parental leave can run out very quickly if your child becomes ill, so a benefit payout from your Child Cover can allow you to take time off to care for your child and spend as much time helping them get better as you can.
- Medical and associated costs. There can often be expensive specialist's bills to pay when your child is sick or injured, and if the condition is permanent or long term, your home may require costly modifications. These things can all be covered by a children's life insurance payout.
- Ongoing living costs. It can be hard to maintain normality when a family member is sick, so if you knew you had a benefit coming in to help you pay for things like your mortgage, school fees, household bills and any expenses for your other children, you would have one less thing to worry about at an already very stressful time.
Many providers will now allow people to take out joint policies. This can prove to be both highly convenient and economical with policyholders able to save up to 5% with Multi-Policy Discounts
- Peace of mind for both people: A joint policy offers peace of mind as both parties know that if either person is too pass away, the other policyholder will receive a benefit to ensure financial security for the family into the future.
- Potential to be more economical for both parties: A joint policy can mean premium discounts of up to 5% for policyholders.
- Convenience: Easy to manage payments for single policy and renew/review single policy into the future.
How Much Life Insurance Do I Need?*
Knowing exactly how much life insurance you should take out is not a simple task. When comparing different policies, it is essential to take the time to consider how much cover would be needed to enable your dependables to enjoy a life free from financial stress in the event of premature death. Some steps to help you determine an adequate level of cover include:
- Think about all commitments your family has now.
- Think of any commitments your family may have in the future.
- Work out the cost of each commitment.
- Work out how long your family will have to cover that cost for.
- Think about debts, children's education costs, future purchases and living expenses.
Common Expenses Life Insurance Can Help Cover
The amount of premium you will pay each month is determined by a number of factors assessed by life insurance providers when analysing the level of risk you carry. In addition to any additional features purchased on your policy, premiums are determined by:
- Age: A key factor to how much insurance someone will pay is there age. Generally, younger policyholders will pay lower premiums as they have longer ahead of them before the provider is likely to make a payout. An older policyholder has a greater chance of passing away from natural causes and hence will pay higher premiums to offset the risk to the insurance company.
- The Insured's Occupation: The nature of a persons occupation can have a great impact on the premiums they will pay on their policy. People working in dangerous occupations such as miners, stuntmen, skydivers will generally pay a higher premium as they are at greater risk of death than the average office worker.
- Lifestyle/Hobbies: The hobbies one pursues outside of work can also have a significant impact on their overall premiums. People who participate in potentially dangerous activities such as white water rafting, motorcycle riding and paragliding can expect to pay a higher premium to reflect the extra risk these pursuits carry.
- Smoking Status: Whether or not someone smokes has a massive impact on the premiums that they can expect to pay with active smokers often paying as much as double what other policyholders pay (see example below).
- Pre-Existing Medical Conditions: People with pre-existing medical conditions such as diabetes or high-blood pressure can expect to pay higher premiums. This can also be found with people with a family history of heart problems.
Different Premium Options Available on Life Cover Plans
One of the most important components to consider when taking out a life coverage policy is how you would like to structure the premiums of your policy. The most common premium structures available in Australia are Stepped, Level and Blended.
- Increase over the life of the policy with the life insured's age.
- May seem cheaper than level premiums initially but will increase significantly in later years.
- Premium will increase if the total sum insured increases each year due to indexation.
- Premium will remain consistent until the policy expires or insured reaches age 65.
- After reaching age 65, premiums will switch to a stepped premium structure
- Premiums will only increase if the sum insured increases with indexation.
- Policyholder is able to determine well in advance what their premium payments will be into the future.
- Offered by some select Australian providers.
- Usually begins with a stepped premium and then switches to a level premium at a certain age.
- Can provide long-term savings over standard stepped insurance structures.
Deciding what payment structure to go with really comes down to the buyers own situation. A stepped premium may be a more affordable option with a lower disposable income earlier in life looking to protect their family and cover long and short term debts. It is essential for each individual to assess their own needs and assess how their financial situation may change into the future before committing to a premium structure for their policy.Back to top
Taking Out Life Insurance Through Your Superannuation
Many super funds arrange life and disability cover to the members of the account. The insurance is organised by the trustee of the fund on behalf of the fund members and in the event of a claim the lump sum is paid to the trustee. The trustee will then determine how the benefit is paid to insureds estate. Many Australians sign up for the default level of cover provided by super funds as it is seen as a low cost option (due to policies being bought in bulk by the fund). While there are benefits to life cover through super, it is important to assess the level of cover you are entitled to receive and determine whether more comprehensive cover through a standalone policy may be necessary.
- You can be automatically covered without having to complete any medical tests if taking out basic cover
- The premiums can be cheaper because the policy is taken out as a group policy and not assessed on your individual risk factors
- It can be tax effective as premiums are paid out of contributions from your employer or from personal contributions that receive a direct tax deduction or are paid from your pre-tax income
- Removes concerns that policyholder may be unable to make premium payments as premiums are automatically deducted
- Contributions towards paying a premium can be tax deductible for self-employed workers
However, make sure you keep in mind that there can also be drawbacks to life insurance through your super, which can include:
- Types of insurance available are limited
- Maximum level of cover available to be taken out may be limited
- If you change employers or super funds, your insurance cover may stop
- The limited amount of cover available which may not be enough for your family's needs after you've gone
- A limited amount of income protection insurance which may not be enough to cover your costs or your recovery time if you are sick or injured and unable to work
- If you do not make a binding nomination or your super fund does not offer binding nominations, the trustee is authorised to determine how your benefit is paid. In most cases the benefit is paid to the dependents though the payment process may take longer and face complications
- If you have more than one super fund, it is possible that you are being charged for the insurance across multiple funds
- If the beneficiaries you name are adults when they receive the benefit from your payout, the benefits paid through your super fund may be taxable
- At the end of the day, you are reducing the funds you are accumulating in your superannuation for your retirement years
The decision of whether to fund life insurance through your superannuation really comes down to the amount of cover you require and if the benefit you are entitled to through Super will cover your financial obligations if you were to pass away. Follow the link below to learn more about life insurance through superannuation.
How Many Life Insurance Policies Can I Have?
There are currently no restrictions in place against obtaining multiple policies with different life insurance providers. So, you can have as many life insurance policies as you require, provided that you are able to keep on top of the premium payments. It is important to note that upon application, you will be required to list all of the life insurance policies that you are currently own, and full disclosure on the fact that you are applying for cover with other insurance providers. An insurance brand may also decide to limit the total sum-insured that you can own from all your policies.
What happens to lost life insurance?
Over the past few years, the government has been reinforcing the message that people need to track down their lost superannuation from previous jobs and roll it all into one account to make it work harder for them. While most people are now aware of the need to do this, many still don’t realise that there may also be small amounts of life insurance money out there that they may be entitled to as well. It is estimated that there is at least $1 billion in benefits from lost or forgotten life insurance policies waiting to be claimed and that the average unclaimed benefit is around $2,000 per person. So it’s certainly worth looking for and in Australia, you can do so through the Financial Ombudsman Service. They offer a free life insurance policy search service, where if you are an authorised person (e.g. an immediate relative or spouse of someone you suspect to have a missing life insurance policy), they will request all life insurance companies that are members of the Financial Ombudsman Service to search their records on your behalf.Back to top
- Compare each of the features included: Consider both the built-in features and additional options of the plans. Are there options offered at an additional cost that may not be necessary for your situation?
- Occupation?: Is this policy designed for people with certain occupations? Are there additional benefits available for people with certain occupations.
- Payment structure: Find out what different payment structures are available to buyers. How will this impact your repayments?
- Flexible waiting period: Does the policy offer a range of waiting periods?
- Options for your family: Does this policy come with options to help protect your family i.e. Joint cover option, child cover option, family care benefit?
- What exactly is covered?: Find out exactly what events the policyholder will receive a benefit for.
- How much will be paid to the policyholder in the event of a claim?: Get a clear understanding of the maximum amount payable under certain events i.e. if the insured suffers a terminal illness.
- Can the policy be upgraded?: Find out if you are able to increase the sum-insured as your situation changes into the future. Can this be achieved without the need for further medical underwriting.
The checklist above is by no means an exhaustive list of what each buyer should consider when comparing policies. It is important to remember that the initial premium repayment quoted is never a true reflection of good deal. It is essential to read through each product disclosure statement closely to determine exactly what is included in your policy.Back to top
Since taking out life insurance is such an important decision, you want to make sure you've thought of everything, so here are some answers to some questions you might not have thought of:
Q. Is a life insurance policy for life?
- A. In most cases a policy can be cancelled at any time without penalty charges because you typically pay your premiums month by month. There is no refund of premium payments that have already been made unless cover is cancelled within the cooling-off period.
Q. Does a life insurance policy cover you overseas?
- A. This depends on the policy and you will need to check your policy document as some policies will cover you wherever you are, and others will have certain restrictions on travel because of the increased level of risk.
Q. How do you pay for life insurance?
- A. In most cases you can choose to pay by cheque, money order, credit card or direct debit, whichever suits you best.
Q. Are you required to take a medical exam before being approved for life insurance?
- A. This will depend on the policy and the insurer and you may be required to have a medical exam and/or a blood test. If you have a pre-existing medical condition it is likely that you will be required to undertake a medical exam unless it is automatically covered.
Q. Is life insurance tax deductible?
- A. For policies provided through a superannuation fund, premiums paid for self-employed persons can be tax-deductible. However, for standalone polices that are not held within superannuation, premiums are generally not tax-deductible.
Q. What is the difference between stepped and level premiums?
- A. Stepped premiums will increase each year as you get older, while level premiums will stay the same except for inflation increases. While level premiums will start out more expensive than stepped premiums when you are younger, over time they equate to being much cheaper, as stepped premiums increase at a higher rate each year.
Interested in Enquiring for Life Insurance?
Taking out life insurance may seem like an extremely complicated process but it doesn't have to be. If you are thinking about taking out life insurance but not quite sure what to look for, you may wish to make an enquiry with a life insurance consultant. A consultant will walk you through the different policy options available and help you determine an adequate level of cover. There is absolutely no obligation to sign up for cover when making an enquiry.
References: ¹ http://www.lifewise.org.au/facts-research