Life Insurance Types Explained – How They Work, Are They Worth It and What They Cover

Everything you should know about the 4 types of life insurance available.

lifeinsurancefeatureimageThere are so many options available in the life insurance marketplace that consumers looking for a policy are almost spoilt for choice. Add in the fact that access to policy information is widely accessible online and you have an environment of highly educated buyers. Despite this, there is still a large amount of confusion around life insurance: What's the specific purpose of each one? How much cover do I need? Should I get my life insurance through superannuation or not? Are stepped premiums the best option or level premiums?

This articles aims to give you a clearer picture of what each type of life insurance covers, how they work and the benefits they can deliver, so that you can make a more informed decision when, and if you decide to take out a policy. One important thing to remember is that there are only 4 types of life insurance, sometimes providers will name them differently or have them as optional cover packs rather than stand-alone policies, but fundamentally each one is the same and has the same goal, which is protecting the financial security of you and your loved ones in the event of death, injury or unemployment.

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The 4 types of life insurance you need to know about

Life insurance is generally offered in 4 different policy variations, with each one focused on providing cover for different events and requirements. Most insurance providers will allow you to purchase these 4 policies separately or together as one large comprehensive policy, which also ends up being the cheaper option in most cases.

Life Insurance

Provides a lump sum benefit to you're family in the event of your death, allowing them to maintain their quality of life. Many life insurance policies will also include additional benefits such as:

    • Cover for funeral expenses and arrangements.
    • Support for mortgage payments and other financial obligations.
    • Estate planning assistance.
    • Cover for extra expenses your family might need, such as child care.
    • A reserve for the surviving spouse should he or she decide to not work anymore.

Tips to remember when choosing your level of cover

When selecting the amount of cover you think you need, there's a few considerations to take into account to avoid being underinsured:

    • Include your families potential future financial situation into your calculations when choosing your cover level, as your assets and debts will likely change during the policies lifetime. An example of this is your mortgage, which will decrease as debt over time as you make payments.
    • When choosing the amount of payment that will be made in the event of your death, try to figure out how much your family would require to create a viable income stream that delivers a living wage.
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Total and Permanent Disability Insurance

This type of insurance provides a lump sum payment in the event you are unable to work due to suffering a permanent disability caused by illness, injury or accident. TPD insurance is usually available in two variations, which are:

  • Any Occupation

Any occupation means that you're eligible for cover if you are rendered unable to work in any job, and do not expect to return to the workforce. The upside of this type of TPD insurance is that you generally pay lower premiums when compared to the own occupation variant with the downside being a more stringent claims process.

  • Own Occupation

Own occupation means your eligible for cover if you are no longer able to work in your current job due to permanent disablement. This type of TPD insurance is no longer available through superannuation.

Additional benefits of TPD insurance

    • Pay off expenses incurred by your disability which includes rehabilitation and nursing care.
    • Help you pay for lifestyle changes, such as modifying your home to accommodate your disability.
    • Provide extra income should your spouse be obliged to reduce, or cut off his or her working hours to care for you.
    • Provide an income stream for you and your family.
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Trauma Insurance

Also called critical illness insurance, this pays a lump sum benefit if you're diagnosed with a specific serious illness such as heart disease, cancer or stroke. The range and definition of conditions vary depending on provider.

How much trauma insurance do I need?

Trauma insurance is one of the most expensive life insurance policy types, and is also the one most likely to be claimed against as it can cover up to 50 or more traumatic events including:

        • Brain tumour
        • Cancer
        • Heart attack
        • Stroke
        • Loss of limbs
        • Diabetes
        • Alzheimer's disease
When assessing the amount of cover you need its wise to take into consideration situations such as:

    • The cost of any immediate care.
    • Lifestyle changes.
    • Any outstanding debts or financial obligations.
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Income Protection Insurance

This type of insurance provides you with a steady income stream of up to 75% of your gross income in the event you are unable to work due to a recoverable illness or injury, providing financial support while you recuperate which you can use to:

  • Maintain your basic household lifestyle.
  • Take care of daily expenses, such as bills and food.
  • Make rent payments or maintenance costs.
  • Help meet mortgage and other debt repayments.

Income protection insurance is flexible and can be tailored to fit your personal circumstances. Its premiums are generally tax deductible, but payments are taxed.

How much income protection insurance do I need?

    • As a standard, most providers will offer coverage of between 70%-80% of your gross income, which will generally be enough to see you through your recovery period. Its unique among the other life insurance types as its the only one which doesn't pay a lump sum, instead acting as a replacement income while you are unable to work.
    • One factor you should think about when deciding on how much income protection insurance you need is how you want the monthly benefits to be paid, such as timing the payments to begin as your workplace sick leave benefits run out.
    • A popular choice is to arrange to have income protection benefits payable through to age 60 or 65 so that an income stream is guaranteed in the event of an illness or injury that has a long-term recovery time.
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At what stages of life are these policies most important?

Everybody's personal circumstances are different, some people have children at a young age while other wait until later in life, just as some people purchase a property early while others continue to rent.  This is why most of these policies are flexible in terms of the amount you can insure yourself for and the range of extra cover options you can choose from.

However, while there is no 'cookie-cutter' guideline to follow when it comes to life insurance, this chart can give you a general idea of when life, TPD, trauma and income protection insurance grow or lessen in importance as you transition from building wealth to securing the assets you've gained into retirement.

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6 steps for making a successful life insurance purchase

Once you've figured out which life insurance policy or policies you need, don't be too hasty and sign on with the first provider you find, remember this is about safeguarding you and your family, and there are many avenues of assistance you can use to gain a better idea of the different insurers and the policies they offer, one of which is the handy life insurance comparison tool located at the bottom of this page.

To give you an idea of the process you will go through when applying for life insurance you can refer to this table which outlines the basic steps along with some helpful information for you to keep in mind.

The processThings to remember
  • Step 1: Research and identify your insurance needs.
  • Do preliminary research on different types of policies and providers.
  • Calculate how much life insurance coverage you will need.
  • Gain an understanding of features and benefits from different policies and providers.
  • Step 2: Consult a adviser and compare quotes.
  • Make an enquiry with an insurance consultant or speak to an insurance adviser for assistance.
  • Receive quotes on policy options and compare.
  • Carefully read the Product Disclosure Statement (PDS) of suitable policies.
  • Step 3: Apply for life insurance policy.
  • Complete the necessary paperwork of your chosen policy (a consultant will assist you with this).
  • Provide accurate details and be honest to avoid any surprises in the event of a claim.
  • Undertake a medical exam if required.
  • Nominate the policy beneficiaries of your choice.
  • Step 4: Finalise your application
  • Review your details and application.
  • Ask your insurer any relevant questions about your policy.
  • Ensure you have a clear understanding of your policies terms and conditions.
  • Sign your life insurance application.
  • Step 5: Underwriting and approval of policy.
  • Your policy will be assessed by the insurers underwriting team.
  • Your life insurance contract is finalised and in effect.
  • Have a clear understanding of the claims process and your ability to adjust your policy.
  • Step 6: Review your policy
  • Review your policy annually.
  • Amend your policy accordingly to any significant life changes.
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2 commonly asked life insurance questions

Life insurance inside or outside of super?

There really isn't a 'yes' or 'no' answer to this question, as it all depends on your personal circumstances and requirements.  Some of the pros and cons of group life insurance compared to stand-alone policies are:

  • Lower premiums
  • No medical exams
  • Potential tax benefits
    • Limited cover options
    • Less flexibility in beneficiary selection
    • Longer wait times on death benefit payouts

Whats the difference between stepped and level premiums?

    • Stepped Premiums: Calculated by your age and increase as you get older, so you generally pay less at the start of your policy and more at the end.
    • Level Premiums: Averaged out over time so you will pay more initially but stand to save money as you get older.  One thing to be aware of is that most policies will revert to stepped premiums once you pass the age of 65 due to the increased risk.
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Compare Life Insurance or Income Protection Quotes

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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

Details Features
Life Insurance
Life Insurance
Choice of cover options and flexible premiums to suit budget. No lock-in contracts and fast application.
  • Benefit payment of up to $1,500,000
  • Cover for applicants up to age of 65
  • 30 day cooling-off period
Go to site More info
Term Life Insurance
Term Life Insurance
Receive up to $1,500,000 in life cover and pay nothing for the first month. 10% Multi-life discount available.
  • Lump sum cover from $50,000 - $1,500,000
  • $15,000 Cash advance benefit
  • 10% Multi-life discount
Go to site More info
Term Life Insurance
Term Life Insurance
Save 25% on NobleOak life insurance and pay no premium for your first month.
  • Benefit of up to $1,500,000
  • Available for applicants up to 69 years old
  • 21 day cooling off period
Go to site More info
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Maurice Thach

Maurice is a publisher for 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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