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The beginner’s guide to life insurance | finder.com.au

Thinking about life insurance but confused by all the jargon? Our guide cuts through the nonsense and provides a simple explanation for how it all works.

The great irony of some of the best moments in life – getting married, buying your own home, having a baby – is that you worry more. With great things, comes great responsibility.

From starting a family to starting your own business, we all have our own goals in life. Keeping those goals safe is important. That's where life insurance comes in. It's the safety net for our biggest fears – if the worst happens, it can help keep the life you built from falling apart.

Video: Life insurance explained

How can you get life insurance in Australia?

First things first, it's important to understand the different ways that you can obtain life insurance in Australia.

This is the type of blanket policy that may automatically come with your superannuation fund.

Pros
Cons
  • It sometimes covers pre-existing health issues if it's a plan that your employer provides.
  • Policy changes are often out of your control, meaning you might wake up one day with less cover.
  • You may not be able to increase your cover if you have any pre-existing health conditions or ailments that the insurer doesn't cover.
  • Your premiums may increase as you get older with the amount of cover staying the same, or your premiums may stay the same while your cover decreases.
    This is insurance without the middleman. It's usually sold to you online, via the TV, with your credit card account or with your personal loan.
Pros
Cons
  • It can be a good option for those in good health.
  • It can be an issue if you have a pre-existing health condition. A lot of insurers medically underwrite at claim time.
  • If you're happy to do it yourself, you don't need to deal with an adviser.
  • Sometimes the death cover is not tax deductible.
  • Some providers, such as NobleOak, offer fully medically underwritten cover.
    • This type provides the largest and most comprehensive safety net. You need to receive financial advice from a financial adviser to obtain this type of policy.
Pros
Cons
  • Fully medically underwritten. The insurer will check your medical history, then agree to issue the policy.
  • The application process can take some time if you have any health issues, as the insurance company needs to contact your doctor and clarify information, as well as go back and forth with a financial adviser.
  • It's quick if you need to claim.
  • Because it's the most comprehensive, it's usually more expensive than direct or group insurance.
  • The policies are guaranteed to renew as long as you keep paying.
  • You're able to lock in the price at your age of application so the cost won't increase as you age – another reason why the earlier you get, in the better.
  • Can be funded by your superannuation to ensure maximum tax effectiveness.

What kinds of policies are available?

How much insurance do you need?

Life coverDepending on your situation, enough to pay off or buy a family home and at least five years' worth of income for your spouse and family.
TPD coverDepending on your age, enough to pay for a home, medical expenses and retirement.
Trauma coverEnough for medical expenses ($100k is recommended for trauma cover) and a year's worth of gross income if you earn over $100k.
Income protection cover75% of your gross income and super. It's best to choose a benefit period of up to at least age 65, to cover you up to retirement. And remember, the longer the waiting period, the lower the premium cost, but most should choose a 30-day waiting period to be safe. Only consider a 90-day waiting period if you have substantial emergency savings.

Premium types

This means that your premium payments go up each year as you get older. If you're not planning on holding your policy for a long time, stepped premiums are best for the short term.

Your premium is based on your age at the time of application and does not increase year-on-year. If you want to control your costs over time, level premiums are best. While they're usually more expensive than stepped premiums in the beginning, they're much cheaper than stepped premiums when you're older.

There are a few tricky life insurance terms worth knowing and expiry age is one of them. This is the term used when a policy has an age limit after which you can't make any more claims. This can range from ages 64 to 79 depending on the insurer.

It's worth knowing that the time of expiry is 12 months after the date listed, meaning you can still make a claim for any event up until that point. You can also still make a claim after this date if it's for something that happened before the expiry age.

Future insurability

A Guaranteed Insurability Feature is a good option to consider. This allows you to stay covered when your personal situation inevitably changes as you grow older, for example, when you get married or buy a house. Most policies allow you to increase or renew your level of cover once every 12 months without having to provide evidence of your health. It also keeps you safe if there are any changes to your health or financial situation.

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