How is life insurance defined?
Life insurance comprises of a number of different types of policies which are designed to provide a financial safety net for a range of unforeseeable events. Life insurance can provide a lump sum for policyholders and their family members in the event of a death, total and permanent disability, and/or critical illness.
What types of life insurance are there?
- Term life insurance. Which covers for death or terminal illness of the policy holder. Read full definition.
- Trauma insurance. Designed to protect you against a life-threatening illness or injury. Read full definition.
- TPD insurance. Provides coverage if you are totally and permanently disabled, and are unable to work again. Read full definition.
- Income protection. Replaces part of your income if you're unable to work due to injury or illness. Read full definition.
- Funeral insurance. Provides a lump sum to cover your funeral expenses when you pass away. Read full definition.
In Australia, there are different types of life insurance available on the insurance market, each with their own definitions and features. It is essential to understand each of these policies to better determine which life insurance plan is most suitable to your situation;
Five important definitions inside a life insurance policy to check
In 2016, the Australian Securities and Investments Commission (ASIC) conducted an investigation into the handling of life insurance claims in Australia. The study revealed large inconsistencies in specific terms and definitions used by different insurers.
In light of these findings, here are the top definitions that are probably in your life insurance policy. We suggest you read them and make sure you understand them, so that you know whether you’re covered if you need to make a claim.
1. Any or own occupation
These terms refer to the definitions of disablement under Total and Permanent Disablement (TPD) and Income Protection insurance - these types of cover are usually bought along with life insurance.
“Any” occupation means you can claim if you are permanently disabled and cannot work in any occupation that you may be suited to by education, training or experience. “Own” occupation means you can claim if you are permanently disabled and cannot work in your usual occupation or chosen field of employment.
Most insurers also add conditions to these definitions including the requirement that you must not be able to earn more than 25% of your previous wage. must have suffered a permanent impairment of “whole person function” or must have lost a minimum of one limb and the sight in one eye.
2. Benefit and waiting periods
A benefit period is the maximum period of time you will be paid a benefit. This can range from 1 to 5 years, depending on your cover (the longer the benefit period, the more your premium will cost).
A waiting period is the amount of time you must wait before you can make a claim and start accruing benefits. This can be anywhere from 2 to 104 weeks, again depending on your cover (the shorter the waiting period, the higher your premiums will be).
Benefit and waiting periods vary widely with insurers. It’s important to be aware of the time periods involved to be able to calculate whether you would have enough to live on both before and after receiving a benefit.
3. Expiry age
All life insurance policies have an expiry age – the age after which your cover cannot be renewed. The expiry age varies with insurers and policy types, but is generally 99 years for Term Life Insurance, 70 for Trauma and Income Protection Insurance and 65 years for TPD Insurance.
While this age is fixed with some insurers and products, others will allow you to extend the expiry age for an additional fee. Income Protection policies for instance can often be extended for up to 10 years and even up to age 80 with some insurers.
4, 5 and 6: Medical definitions
A heart attack is a disorder characterised by a loss of blood supply and oxygen to the heart muscle due to a blood clot in one of the connecting blood vessels. Common symptoms include chest pain, shortness of breath, dizziness, restlessness and vomiting, but symptoms will vary with each person.
However, few life insurers define a heart attack in such simple terms. Many also grade heart attacks by how severe they are, which is calculated by conducting various tests and then putting the results through an algorithm. Others require ECG changes as well as blood tests with specified levels to qualify for a benefit.
Cancer is any malignant tumour that is positively diagnosed with histological confirmation and characterised by uncontrolled growth of malignant cells and invasion of tissue. However cancer is a very broad and complex term and insurers often have their own definitions for different types of cancer.
In the case of skin cancer for instance, non-melanoma cancers are usually not fully covered. Melanomas are usually only covered at an additional cost and a benefit only paid if the cancer has spread to other organs or the melanoma tumour is at least 1.5mm thick.
Multiple sclerosis (MS) is a disease of the central nervous system. Some parts of the body it affects includes the spinal cord, optic nerves and your brain. But because it affects people differently, insurers often have their own definitions of what constitutes MS.
All insurers require a diagnosis from a neurologist and most want evidence of at least one episode of neurological deficit. Others require you to be unable to function independently or have a permanent impairment of “whole person function” before a claim will be paid.
What types of expenses can life insurance cover?
Life insurance policies' benefit payout can alleviate the financial burden that may arise, in which recurring expenses often include:
- Daily living expenses, such as food, clothing, transportation, etc.
- Utilities; electricity, water and gas.
- Outstanding debts; either short-term or long-term, which often include credit card debts, personal loans, car loans, etc.
- Insurance premiums, such as health, car, home and contents insurance.
- Children's education expenses.
- Medical cost.
- Home modification costs and nurse/housekeeper hire fees in the event of disability.
- Outstanding taxes, legal and funeral costs in the event of death.
It is essential to know the different types of life insurance policies that are available in Australia. You will have to assess which plans are most suited to your needs, as different policies are designed to provide protection for different circumstances.
Term life insurance is a type of cover that provides a lump sum benefit to your nominated beneficiaries in the event of your death, or if you have been diagnosed with a terminal illness. Terminal illness is defined as an illness that reduces your living expectancy to less than 12 months from the time of diagnosis by a medical specialist.
This type of life insurance is set for a certain period of time (or "term") that you have nominated at the time of application. You have the option to choose a period of 5, 10, 15, 20 or 30 years of coverage on your life policy, depending on your personal situation and needs. It is the most cost-effective life insurance policy that is currently available in Australia.
Trauma cover is a type of living insurance that provides a lump sum benefit upon diagnosis of a serious medical condition, which often includes heart attack, stroke or cancer. Trauma insurance can provide additional support for your existing health insurance (Medicare and/or private insurance) in the event a medical trauma, be it an illness or injury.
Different trauma events will have their own definitions, therefore, it is important to understand what they are to have a clear understanding of what you will or will not be covered for. These definitions can be found on your Product Disclosure Statement (PDS).
A medical trauma can incur significant expenses, from hospital care, specialist treatment, to the possible costs associated with accommodating a comfortable recovery at home, which may not be covered by your existing health insurance. Trauma insurance is designed to close this gap in your health insurance, while also help you keep on top of your financial commitments.
Total and permanent disability (TPD) insurance is another type of living insurance that covers you in the event of a disability that is deemed total and permanent, resulting in you being unlikely to return to work again. The definition of a total and permanent disability often includes one or more of the following conditions, although these may vary between providers:
- Loss use of limbs; arms and/or legs.
- Loss of sight.
- Absence for 6 months or more from work due to an illness or injury and you are unlikely to return to normal working capacity again.
The lump sum benefit is payable if the insured successfully meets the TPD definition as set out in the policy. There are four types of TPD definition available in Australia, which may vary between providers:
- Own occupation definition: Under this definition, your benefit is payable if;
- You have become permanently disabled as a result of an illness or injury,
- You have been absent or unable to perform your usual occupation in your chosen field for three to six consecutive months,
- You are unlikely to ever return to work in your primary occupation.
- Any occupation definition
- You have become permanently disabled as a result of an illness or injury,
- You have been unable to complete the duties of your usual occupation for three to six consecutive months,
- You are unlikely to ever be in gainful employment in any occupation that you are reasonably suited by education, training or experience.
- Home duties definition: The home duties definition only applies to total and permanent disability insurance policyholders that are homemakers, in which cover is provided for individuals who perform domestic duties on a full-time basis, without receiving any pay. Under this definition, a benefit is payable if:
- You are unable to perform home duties for three to six consecutive months,
- You are unlikely to be able to perform normal domestic duties or any occupation for which you are reasonably suited by education, training, or experience.
- Non-working definition: Under this definition, your benefit is payable if as a result of an illness or injury, you suffer from:
- Loss of limbs,
- Loss of vision,
- Loss of independent existence, or
- Cognitive loss.
Income protection is a type of cover that is designed to provide a form of replacement income while you are unable to work temporarily due to a serious illness or injury. In general, an ongoing monthly benefit of up to 75% of your average salary is payable if you are disabled for longer than the waiting period or until your benefit period expires (whichever comes first).
Waiting period is defined as the amount of time that you must be disabled until your receive your first monthly benefit payment. The most common waiting periods to choose from are 14, 30,60, 90 or 180 days, and 1 or 2 years. The shorter the waiting period, the higher your premium will be. On the other hand, benefit period is the amount of time you will receive your monthly benefit payment while you are disabled. You can opt for 2 or 5 years, or to age 60, 65 or 70.
As previously mentioned, for your income protection claim to be eligible, you must be disabled and able to satisfy the definition of a disability from either the following:
Total disability: The definition of a total disability will often vary between providers, however you are considered to be totally disabled if you can successfully meet one of the three types of definitions;
- Duties based disability
- You are unable to perform one or more of your main income producing duties at your regular occupation due to an illness or injury,
- You are under the care of a medical practitioner,
- You are unable to work.
- Hours based
- You are unable to work and perform the main duties of your regular occupation for more than a specified number of hours per week, usually ten hours per week, because of your illness or injury,
- You are working in any other gainful employment,
- Under the regular care of a medical professional.
- Income based
- You are able to work in your regular occupation or any other gainful employment, however, you are suffering from a reduction in your income as a result of your illness or injury. The amount of reduction will vary between insurers,
- You are under the care and regular supervision of a medical practitioner.
- Partial disability: You are considered to be partially disabled if you are unable to work in your regular occupation or any other employment in full capacity as a result of your illness or injury, and:
- You are only able to work for a limited amount of time,
- You are not totally disabled,
- You are earning less than your pre-disability income, and
- You are under the regular care of a medical professional.
Funeral insurance is a form of personal insurance that covers any funeral and final expenses, paid to your nominated beneficiaries in the form of a lump sum benefit. It is important to understand the terms and conditions of your policy, as they often vary significantly between different providers.
Note that funeral insurance will only cover you for accidental death in the first 12 months. Therefore, no benefit is payable in the first 12 months if you pass away due to a natural cause or an illness. The life insurance definition of an accidental death is an event that occurs unexpectedly or is unintentional, resulting in death and it is independent from any other cause. After the first 12 months, funeral insurance will cover you regardless of the cause of death.
Other important definitions to be aware of
When comparing life insurance policies online, it is essential to get a hold of the PDS as it contains all the important information and life insurance definitions that you will need to help you make an informed decision. Definitions can vary between providers so it is good to review the product disclosure statement to be aware of any variations.
Life Insurance Definition of a Smoker
When you apply for life insurance, it is important to understand who is classified as a smoker. You are considered as a smoker if you have used nicotine products in the last 12 months, regardless of how much or how often. Nicotine products include cigarettes, cigars, chewing tobacco, or nicotine patches. Even if you are a casual or social smoker, under a life insurance definition, you will still be categorised as a smoker.
Life Insurance Definitions of Different Trauma Events
As previously mentioned, different trauma events will have their own definitions, which may differ between insurance providers. It is important to have a clear understanding of what they are to determine the suitability of the trauma policy to your needs.
For example, under an AMP trauma insurance policy PDS, cancer is defined as “the presence of one or more malignant tumours (including leukaemia, lymphoma, hodgkin’s disease and colorectal cancer from Dukes stage A) characterised by the uncontrollable growth and spread of malignant cells and the invasion and destruction of normal tissue.”
Activities of Daily Living
Under a total and permanent disability insurance policy, an individual is considered to be suffering from loss of independent living if he/she is unable to perform at least two activities of daily living, which include:
Obtain the complete list of life insurance definitions from your policy’s Product Disclosure Statement (PDS)
This list is by no means exhaustive, as there are many more other definitions available from your life insurance policy’s PDS.
Is life insurance necessary?
The perpetual question of whether you really need insurance or not is always brought out whenever the topic of life insurance comes up. Some people would argue why pay for something that you are not sure of happening. Truth be told, life is a big gamble, so is life insurance. You never know whether the worst will happen or not, but the question is if it happens, are you prepared for it.
Moreover, if accidents and deaths occur, will it have a big impact on your loved ones? Will they be able to cope up when such inevitabilities happen? Below are just some advantages why you or others need insurance.
- To give protection for your family – Most people want to give the best for their loved ones. That is why they spend most of their lives working hard to provide the needs of those whom they love. They even work harder in order to build something that would leave their families comfortable in every possible way. However, death can change all of this, especially if a breadwinner dies - it could cripple the family financially.However, if one has life insurance, they have peace of mind knowing that their loved ones are protected no matter what happens to them. It may sound morbid, but the lump sum benefit that your family can get at the time of your demise can help them with whatever expenses they will have to face such as medical and funeral expenses, taxes, mortgages, and debts. If one has planned well enough, life insurance can even be used to pay for their children’s college tuition.
- It entitles you to medical benefits – The second best reason why people need insurance is it gives you access to medical benefits. Aside from death, another inevitability that people are most vulnerable to is accidents or illnesses which can also greatly affect a person’s lifestyle.However, the impact of such things can be softened when you come prepared. When you have life insurance, it can help you save on medical expenses and give you access to better medical treatment.
- It is a safer investment option – When you invest in products such as bonds or mutual funds, there is always a chance of losing your money on such. Your profit or loss will depend on the health of the market. While it may be the fastest and best way to build wealth, it can also be the fastest route where you can lose your money. That means it is not the safest way to a secure financial future. However, life insurance can be another avenue which would allow you to diversify your investments. It gives you a safe avenue where you can invest your money because you can be sure that you will always get a benefit from it.
- It gives you peace of mind – Having the knowledge that your family will be secure no matter what happens to you gives you a level of security and peace of mind. It provides some sort of an escape hatch you can depend on when something worse happens.
Who needs life insurance?
Life insurance is about protection and preparation. It protects and prepares your family if anything happens to you. However, how do you really know if you need insurance or not? Here are some scenarios you can use as a guideline whether you need life cover or not.
- You have children
Children do not generally need life insurance. Though there might be instances where life insurance is needed, getting insurance for your children will depend whether you can afford it or not. Not having one for your little ones won’t make any difference, though, in general.
- You are starting a family
If you are a new family, it is a good move on your part to get life insurance. Not only will your rates be cheaper now than when you get older, but your future children can benefit from your income as well even if you are not around.
- You already have a family
If insurance is already a must when you are thinking of starting a family, how much more important is it if you have a family already. Life insurance should be considered for people both working inside and outside the home. The costs of replacing someone to do domestic chores, budgeting, and childcare can cause significant financial problems for the surviving family.
- You are a young professional
The reason a single adult would typically need life insurance would be to pay for their own funeral costs or if they help support an elderly parent or other person they may care for financially. However, if you have other sources of income, then it may not be necessary.
- You are a young couple
You need to decide as a couple whether you will need life cover or not. If both of you earns an income you feel comfortable living on alone if their partner should pass away, then life insurance would not be necessary except if they wanted to cover their funeral costs.
- You are a senior citizen
As long as you do not have people depending on your income for support, life insurance at this stage in life would not be necessary, unless again, you do not have any other means to pay for your funeral expenses.
Depending on your circumstance and needs, it is essential to consider which type of life insurance that is most suited to you and your family's personal situation. Life insurance is not a one-size-fits-all type of product and different needs will require different level of protection. Life insurance policy's features, benefits and options, including definitions often vary between provider.
Therefore, it is important to read the Product Disclosure Statement (PDS) closely and know which events you are and are not covered for. Comparing multiple plans, that are available in the market, is imperative to ensure that you are obtaining the right product for you and at the right price.