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The Beginners Guide to Life Insurance | finder.com.au

guideConsidering life insurance but don't know where to start? Our guide provides an in-depth explanation of how it all works, to get you on track to finding the right cover.

Life can throw many curve balls your way, so it’s essential you take steps to safeguard your loved ones before tragedy strikes. If you’re worried about the unexpected, read this guide to see how life insurance can help.

What's the purpose of life insurance?

Life insurance is critical if you want your family to be able to look after itself following an extremely dark and daunting time. This form of insurance provides a plan to financially aid your loved ones when you’re no longer living. It can also help with costs after suffering a critical injury, accident or illness.

What can life insurance be used for?

Life insurance is a protection plan that provides peace of mind that your loved ones will be looked after when life takes a turn for the worst. The policy has expanded its parameters beyond paying only lump sum payments to family members when you die. It now covers clients in the event of a terminal illness, accident or death. Here’s how it helps.

  • Payment in tragic situations. Pays a lump sum benefit to beneficiaries in the event of a terminal illness, or death.
  • Eases the financial pain. Benefit can help you pay the mortgage, utilities, loans, debt and daily necessities.
  • Pays for funeral costs. Your family can use some of the lump sum to cover immediate funeral costs.
  • Future costs taken care of. You partner or spouse can use the lump sum for future expenses, e.g. education expenses for your children.

When should I consider life insurance?

There are a number of reasons why you should weigh up a life insurance policy. Here’s a list of reasons and circumstances where individuals would consider life insurance.

01-living

Maintain your families standard of living

02-mortgage

Pay off the mortgage on your house

03-debt

Pay off any outstanding debts

04-education

Provide for your children's education

05-tax

Pay off outstanding tax

Young and single workers

While young people often see themselves as invincible, the unexpected can happen. If you fall into one of these situations, you should look to some form of life insurance cover.

Young couples with no dependents

If you’re married and have no children, running the risk of being unable to provide for your partner is daunting.

Young working parents with children

If you have dependents like children, it’s wise to seek security for their interests.

Business owners'

It can be a burden to lose your working partner; sometimes this mounts financial and emotional stress, which can see the gates closed or doors shut.

Older workers' with no children at home

This is a time when you could be looking to finance university for your children, or you’re focused on maximising your retirement savings.

You’re an elderly citizen with no dependents

After working your whole life, it’s likely you’re relying on a limited retirement fund to live. You may not have the finances to fund costs like a funeral, which can be a major burden mounted on your family.

Let’s now take a closer look at the features of each insurance type in chapter three.


What types of life insurance are there?

Life cover and insurances like trauma, TPD, income protection, business expenses and key person insurance can be bundled together, to secure more comprehensive cover. This could make the difference in safeguarding your family from financial pain going forward. Here’s a list of the features each protection policy has.

Life cover

Trauma insurance (critical illness insurance)

Income protection

Total and permanent disability insurance

Business expenses insurance

Key person and partner insurance

Life Insurance States Graph

Getting the best bang for my buck

Comparing life cover policies and finding a suitable option for yours and your family’s future needs is vital. Sadly, research compiled by Rice Warner in 2013 found only 42% of Australian families had a sufficient policy in place to continue the standard of living for remaining loved ones. So, before signing on to a policy, speak to an adviser or insurer about the best options to match your budget, and your family’s future needs. If you’re unsure about what to look out for, here’s a basic guide of what to look for.

Make sure you understand

Note. It’s important to have a thorough read of your Product Disclosure Statement (PDS). This is the document provided by insurance funds. It will ensure you’re fully aware of everything that’s included and excluded in your prospective life cover contract.

How do stepped or level premiums work?

When taking out life cover as a stand alone policy, or a bundled policy including trauma, TPD, income protection or business exposure and key person insurance, you have two ways to control the cost of your premium over time. This is achieved by selecting either a stepped or level premium structure. As the chances of you claiming increase as you get older, it’s essential to make sure you can still afford your premiums as you age. To help your future financial and medical situation, understand how premium types work.

  • Stepped premium. Cheaper at the beginning of your policy, but the cost increases as you get older.
  • Level premium. The more expensive option at the beginning, but your premium is fixed, and won’t fluctuate as you age.
  • Hybrid. This is a mix of both structures.


Myths about life insurance to be aware of

There are many misconceptions when it comes to the cost of life insurance, so before you jump on the bandwagon, read this guide to see the truth about the costs.

    • Premiums are tax deductible (conditional). This varies between insurers, but normally only self-employed people can receive tax deductible premiums. Life insurance must also be through superannuation in order for a tax deduction to be received.
  • We all need life insurance. Not everyone needs life insurance. You should consider your individual and family circumstances before signing on to a policy.
  • Life cover is extremely expensive. Not the case. No one policy is the same, and your circumstances are assessed on individual merit. While you’re not able to see short-term benefits, life cover works out cheaper than car insurance.

What are the key features of life insurance?

There are a range of features included in your life cover policy that you need to be aware of. As definitions vary between insurers, it’s important to understand what is included in your policy. Here’s a list to help.

Life insurance that’s provided through superannuation: Do I loose out on key features?

Purchasing life insurance through your super fund is cost-effective, but it’s important to remember that while there’s a financial incentive, your cover is not as comprehensive as a private policy. Given the low cost, there’s often limited benefits and flexibility to change your policy to your changing circumstances. This could leave you and your family exposed if you have specific needs, e.g. higher debt obligations in the future. Here’s a list of the benefits and disadvantages of life cover through your super fund.

BenefitsDisadvantages
  • A cheaper cost. Life cover through a superannuation fund is cheaper, and can be cost-effective in the short term.
  • One standard policy for all members of the super fund. There can be less flexibility and coverage to suit your needs.
  • Automatic acceptance. Cover is automatically included in a super policy, so there’s no need for any medical assessment when you sign on.
  • A lengthy claims process. The claims process can be delayed as your benefit is paid into your retirement fund, and then distributed to beneficiaries.
  • Defined range of people that can be made a beneficiary. This is typically limited to children, legal representatives and spouses.
  • Convenience. As the policy is included with your super you won't need to go through the application process.
  • Strict rules regarding when benefits are tax free. Typically only financially dependent beneficiaries will receive tax-free payments.

Buyers guide: Tips to get the most out of your policy and it's features

Life insurance has a wide-range scope, so it can be difficult to understand exactly what you need to know before signing on to a policy. There are many requirements for buyers to be aware of. Here’s a list of what to look out for.

  • Review your policy. You should assess your policy whenever your circumstances change. This could be for instances when you take out loans, a mortgage, or have children get married.
  • Comprehensive coverage is crucial. Cheaper policies aren’t always the best, despite the financial savings in the short term. Life cover is a security for your family, so be selfless in how much you fork out for their future without you.
  • Buy when you’re healthy! Premiums increase as you age, become overweight or unhealthy, as the risk of suffering medical complications increases.

The application process

Life insurance provides a certainty that your loved ones will be covered if you die or suffer a terminal illness that sees you unable to work, or lose all capacity to care for yourself and your family. Insurers will assess your health, occupation and lifestyle before signing on. This helps them devise a contract and terms and conditions surrounding the financial safeguard. To meet the requirements, you’ll need to provide proof of your medical history, and any other relevant information before signing a declaration as a legally binding contract.

Do I need to undergo a medical exam? What’s does it consist of?

Some insurance agencies will request you undertake a medical examination at the time you apply for your policy, but this varies between certain life cover funds. A medical examination can consist of the following tests:

  • Physical exam
  • Blood test
  • EKG
  • X-ray
  • Height and weight assessment

How do I prepare for a life cover medical exam?

To adequately prepare for a life cover medical assessment, you can follow this seven-day structure to ensure you’ll get the results to find a suitable and cost-effective policy for your personal needs.

Days out from examTips to follow
7 days
  • Eat healthy food, and avoid fatty food.
3 days
  • Avoid drinking alcohol to reduce liver enzymes and falling ill.
  • Avoid caffeine such as coffee or carbonated drinks like Coca-Cola.
1 day
  • Don’t use pain medication or nasal decongestants.
  • Try not to do strenuous exercise.
Day of exam
  • Avoid tobacco products (for heavy smokers, it may take up to 20 days to leave your system).
  • Drink a cup of water an hour before the exam to purify your bloodstream ahead of a urine or blood test.
  • Take your doctor’s or respective GP’s contact details to the assessment.

What happens after I’m assessed?

Following your assessment, you’ll be informed of the outcome by your insurance agency. If successful, your insurer will send you a copy of a Product Disclosure Statement (PDS), which is an outline of your contract, and all inclusions and exclusions aligned to the policy.

How does claiming work?

When you pass away, your beneficiary (person who receives the payout) will look after the claims process. This entails working through all criteria with the funds claim department. Here’s a list showing what is needed to claim.

  • Follow the claims procedure laid out in your policy. If your dependents can’t locate it, they can request a fresh copy.
  • Confirm you’re the beneficiary to receive compensation. Identification will need to be provided.
  • Contact the insurance agency and work with a member of the claims department. If you’re covered through a single agent, they will be your point of call.
  • Fill out essential documentation for the insurance company. This can include documents like death certificates.
  • Wait for your assessment and payment. The timeframe varies between life insurance funds, so be sure to chase this up regularly after a claim is lodged.

Claiming other types of insurance

There are steps you can take to ensure your claim is successful. Here’s how you can achieve this!

  • Verify eligibility. Not all illnesses and injuries are covered, so be sure to check what’s on the list with your fund.
  • Proof of documentation. Doctor’s approval may be required.
  • Stick to claim deadlines. You must make sure your claim is lodged within the deadline determined by your insurer. This could be within 48 hours or immediately after a tragedy occurs.
  • Honesty is the key. Insurance agencies take on a rigorous process before granting compensation so be sure you’re up front and honest about the situation.
  • Cooperate with your insurer. This could entail medical assessment or any further documentation.

Misconceptions that people have about claiming

If you’re a business owner or head of a company, it’s vital you disclose all relevant information to avoid claims being knocked back due to dishonesty in your application. Here are some myths about the claims process.

  • The claims process is difficult. Not if you’re honest. Life cover insurers will pay out compensation if their client has provided all relevant information and is keeping to their part of the policy’s criteria.
  • If your claim is rejected, all insurers will follow suit. Not the case. Each insurer varies on their stipulations for a successful claim.

Always read the fine print

You must remember that conditions and compensation vary between insurance agencies, so be sure to have a thorough read of what’s included and excluded in your policy. Don’t be fooled into thinking that a low cost contract is best for you. Generally, the most comprehensive form of cover is more expensive, but safeguards your family if the worst was to happen.

Questions that everyone asks about life insurance

If we haven’t been able to answer your concern surrounding why you should look to life insurance for financial security, read through some of our frequently asked questions to see if there's an answer for you.

If you have any other questions, don’t hesitate to contact our team at finder.com.au for more assistance on life insurance.


Picture: Shutterstock

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