Your Life Insurance Questions Answered

Answering the most frequently asked life insurance questions

If you’re shopping around for a life insurance policy you probably have a few questions that need answering. These might be on life insurance in general, what exactly is covered by your policy or how it works for your specific medical issues. Below are some of our frequently asked life insurance questions, broken down by category:

Life insurance basics

Q. What is life insurance and how does it work?

A. Life insurance is an insurance policy that will pay benefits in the event of the unthinkable. Death, terminal illness, severe injury or health issues and disability can be covered. Life insurance can pay lump sums to beneficiaries or a portion of your regular income.

Q. What are the different types of life insurance?

A. In Australia life insurance can come in several parts. At its core it will pay benefits to your chosen beneficiaries if you pass away or are diagnosed with a terminal illness. In addition to this you can choose options like total and permanent disability (TPD) insurance if an injury or illness leaves you permanently disabled, trauma insurance for specific issues like a heart attack or organ failure and income protection insurance, which pays a portion of your earnings if injury or illness leaves you temporarily unable to work.

Q. How much cover do I need?

A. You need to decide how much cover is right for you. Higher potential payouts mean higher premiums but better cover. Consider the cost of paying outstanding loans, mortgages and credit card debts, how much your children’s living expenses and education will cost, funeral costs and anything else. The right level of cover will be enough for your family or beneficiaries to carry on without you. A financial advisor can help you find the right number.

Q. What does life insurance cover?

A. Depending on your policy, life insurance will pay out in the event of your death, terminal illness, severe medical issues, permanent disability or temporary inability to work.

Q. How can life insurance help me?

A. Life insurance is designed to financially take care of your family or other nominated beneficiaries if the unthinkable happens. It can also take care of you personally if things go wrong.

Q. Is life insurance compulsory with superannuation?

A. Some superannuation funds will automatically sign you up for their life insurance policies when you join, while others might simply offer it as an option and others won’t offer anything at all. Depending on the super fund, it may or may not be mandatory. However, by getting life insurance through your superannuation fund you can pay premiums with the super contributions. If you have a self-managed super fund (SMSF) then there are a lot of additional options for you.

Q. Are life insurance premiums tax deductible?

A. Sometimes. It depends on your policy and the taxation laws of your state. If you get life insurance through your superannuation then premiums are generally tax deductible. In other cases they may be partially tax deductible or not at all. Your insurance company or state tax office can give you a clear answer and explain the conditions.

Income ProtectionTax deductibleTax will apply to any benefit payments
Term Life InsuranceNot tax deductibleTax does not apply to benefit payments
TPD InsuranceNot tax deductibleTax does not apply to benefit payments
Trauma InsuranceNot tax deductibleTax does not apply to benefit payments

Q. Are life insurance benefits taxable?

A. Sometimes. In some states and for some payments life insurance counts as taxable income for your beneficiaries. This can be very significant if your benefit is paid as a lump sum. Some plans offer you more control over the payouts so you can minimise the amount lost to tax. Some payouts, however, are not subject to tax. Once again, it depends on the policy and the benefit. Contact your insurer or state tax office to find out how it might impact you.

Costs and refunds

Q. How much does life insurance cost?

A. The cost mostly depends on your level of cover. The more conditions covered and the bigger the benefits, the higher your premiums. Price is also affected by how likely you are to make a claim, which is influenced by your occupation, lifestyle, hobbies, smoking status and similar factors. The higher your risk levels, the higher your premiums.

Q. Will my premiums go up?

A. Most likely. Insurance companies typically review risk levels annually and adjust their policies accordingly. They are not allowed to specifically target you with price changes, but can adjust premiums for a group of people that may include you, such as all smokers, or everyone in a certain age group. Your premiums may change at these annual review points, and will usually get more expensive due to the overall risk of health issues getting higher with age. Some insurers, however, may offer premiums that will not change for the entire life of the policy.

Q. What are stepped premiums?

A. Stepped premiums start low but get much higher as you get older. They are reviewed and raised each year. By the time you hit the higher-risk ages of 50+ your premiums may be extremely expensive.

Q. What are level premiums?

A. Level premiums are set at a fixed annual rate when you sign up, adjusted only for inflation. They are more expensive to start with but become much more cost effective later in life. Because the premiums are determined when you sign up it is still very expensive for seniors.

Q. What are hybrid premiums?

A. Hybrid premiums start out as stepped premiums, but at a certain age turn into level premiums. This is a good option for people looking for a long-term policy, but who cannot afford the initial expense of level premiums. Sometimes hybrid premiums will revert back to stepped premiums at later ages.

Q. Should I get stepped, level or hybrid premiums?

A. Stepped premiums are good for short-term insurance policies due to their low initial cost but sharp increases. Level premiums are ideal for long-term policies but may be unaffordable at first. Hybrid policies can vary but will always combine some of the benefits and drawbacks of both.

Still not sure which is right for you? Find out how much each one might cost.

Q. Can I get a refund if I cancel my life insurance policy?

A. Probably not. There are only two ways to get your money back when cancelling a life insurance policy. The first is if you cancel within the cooldown period, which is typically within 20 or 30 days of purchasing the policy, where you get a full refund as long as you haven’t made a claim. The second is if you paid in advance for your next year of cover, in which case you can get a refund for that amount minus some fees. Outside of these two circumstances you cannot get a refund on life insurance.

Q. How do I get lower premiums?

A. You have several options for getting lower premiums:

  • Look for discounts such as multi-policy discounts for more than one policy with the same insurer, loyalty bonuses for staying with the same brand for a certain amount of time or family discounts if you have immediate family members who have policies with the same insurer.
  • Reduce your risk levels by not smoking, living a healthy lifestyle and avoiding dangerous jobs or pastimes.
  • Reduce the cost of your cover by cutting out unnecessary additions for a lower premium. For example, you might drop trauma insurance because it is largely covered by health insurance, or you could remove an income protection option and rely on worker’s compensation instead.

Q. Does life insurance include GST?

A. No. As a financial product life insurance is input-taxed. This means the seller cannot include GST and you cannot claim GST credits on life insurance costs.

How to get life insurance, and your eligibility

Q. Can I get life insurance as an Australian expat living overseas?

A. It depends on your insurer, your travel plans and where you are living. Some insurance policies only cover those residing in Australia while others may cover you only for short periods of time or in certain countries. It often depends on how dangerous your location is considered according to the Australian government’s travel advisories for that region. You may be required to return to Australia if you make a claim.

Q. I am self-employed. Can I get life insurance?

A. Yes. You may face additional restrictions or an elevated risk profile to compensate for a less-secure income, but you can still purchase life insurance.

Q. What questions will I be asked during the assessment?

A. Your insurer may ask you questions about your health, lifestyle, occupation and family medical history. These are used to determine your risk levels and required cover. Answering them might be uncomfortable but you must be honest as any inaccurate or false information could be used as a basis for denying a claim.

Q. Do I need to undergo medical or blood tests?

A. No. It is possible to get a life insurance policy without a medical or blood tests, but these policies are usually less comprehensive and have lower limits. Certain policies are only available if you are willing to have a medical checkup and/or blood test.

Q. Do I need life insurance if I already have some with my super fund?

A. Maybe. It depends on what kind of policy you have and what you want. Your superannuation life insurance may be inflexible and simply not good enough for your needs. For example, the payout might be way too low to cover your family, or you might want a policy that also covers your partner as well as you for disability and trauma.

Q. I have a major pre-existing condition, such as having cancer in the past. Can I still get life insurance?

A. Yes, although you may not be eligible for some policies or benefits. They will usually gather as much information as they can and then make one of the following decisions:

  • They might decide it’s no problem and insure you at standard rates with full cover anyway.
  • They might charge extra loading to cover that condition.
  • They may specifically exclude that condition from your cover.
  • They might decline to insure you at all.

Your policy and your cover

Q. Can I cancel my policy?

A. Yes. You may cancel your policy at any time you wish, but will generally not be entitled to any refunds.

Q. Can I change my level of cover?

A. Generally yes. Because life insurance is often a long-term investment to be held throughout changing circumstances, the vast majority of insurers make it easy to adjust your level of cover. Different insurers may have different levels of flexibility. Most will easily let you add children to your policy, add or remove features like TPD insurance and carry out other changes. If you’d like to change your policy just get in touch with your insurer and ask them about it.

Q. What are exclusions?

A. These are conditions under which the insurance company will not pay benefits. One common life insurance exclusion, for example, is intentional self harm or suicide within the first 13 months of taking out the policy. Others might include reckless behaviour under the influence of drugs or alcohol, or injuries sustained while doing something illegal. Read your life insurance policy’s product disclosure statement (PDS) for a list of exclusions that apply to your policy.

Q. What is loading?

A. Loading is an additional cost added to your premiums for a particular risk factor. It raises your premiums to cover something that you are now more at risk of. You might start paying substantial age-related premiums after the age of 50, for example. Or, if you decide to start competing in mixed martial arts tournaments, you will probably have a loading imposed to compensate for the increased chance of injury.

Q. Am I covered outside of Australia?

A. Most policies will cover you while you are on holidays, or for shorter overseas stays. Some of the conditions may change, however. Certain injuries or illnesses might only be covered inside Australia but not elsewhere, and there may be additional restrictions. Check your life insurance PDS or contact your insurer to find out how it works with your policy.

Q. Does my life insurance cover my children?

A. Most policies do not cover children by default, but have this as an additional option. Children’s cover usually works a bit differently, with limited cover for medical emergencies, no TPD option and different trauma insurance choices.

Q. Can I get a family or couples policy?

A. Yes. Getting a family or couples policy can be a cost-effective way of covering you, your partner and your children if applicable. There will typically be different benefit schemes, restrictions and limits for the policyholder, their partner and any children.

Q. What if I suffer the same claimable medical event more than once, such as two separate heart attacks. Can I claim for both?

A. Generally yes, but only up to the prescribed limit for that event. If you have trauma insurance that covers you for heart attacks and you use up 75% of the limit for your first heart attack, then you will only be able to claim the remaining 25% the second time.

Dealing with insurers and making claims

Q. When will life insurance not pay out?

A. Your policy will not pay out if any exclusion applies, such as if you were injured while carrying out illegal acts. Other reasons for it not paying out could be because your policy does not cover the incident in question, you have not paid your premiums or you have violated the terms of the policy such as by being dishonest.

Q. Do I need to tell my insurer about my medical history, or is it up to them to find out?

A. You are required to provide all relevant medical information. This includes pre-existing conditions, current or prior medications and information about previous health issues. Failure to do so may result in the insurer cancelling or reducing your cover.

Q. What if I forgot to tell the insurer about a pre-existing condition?

A. If this is the case then your cover may be in jeopardy. You should update your insurer on this information as soon as you are able.

Q. What if I have a complaint about or dispute with my insurer?

A. If you have a complaint about or a dispute with your insurance provider then you should contact the Financial Ombudsman Service to resolve it. They will act as an independent third party to resolve the issue.

Q. I have a pre-existing medical issue but I am managing it well and my doctor says it is not a problem. Do I still need to tell the insurer?

A. Yes. You are required to inform your insurer of existing medical conditions, even if it is being managed and not currently causing health issues.

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Maurice Thach

Maurice is a publisher for finder.com.au. Daily research of Australia's insurance offerings allows him to breakthrough the noise of the many policies out there to uncover what can (and can't) be covered. Maurice hopes to make finding the right insurance easier for all.

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