Top 13 Trickiest Life Insurance Terms

About to sign up for life insurance? Make sure you understand what these terms mean.

It’s important that you understand all the key terms used in a life insurance policy before signing up. Insurance policies will often have very specific definitions that will affect the structure of your policy.

1. Indexation

In the product disclosure statement, you might see this written as indexation benefit, indexation for inflation or simply indexation.

This is how your policy keeps up with inflation and the increasing cost of living. You might have insurance for $100,000, but in 20 years that might only be equivalent to $80,000. Indexation ensures your insured sum is not affected by inflation.

2. Underwriting

Underwriting is the process insurers use to consider your life insurance application. During this process, insurers decide whether they want to cover you as well as what kind of cover and terms they’ll offer. To be successful, an application must meet an insurance company’s underwriting criteria.

Broadly speaking, insurers need to have a good chance of making more in premiums than they will pay out in the end.

The following are some of the things insurers will take into account:

  • Your occupation
  • Your age
  • Your current health
  • Your pastimes
  • Your income

3. Stepped, level and hybrid premiums

Your premiums are the regular, ongoing costs of your life insurance policy and you usually need to pay these annually. There are three different types of premiums:

  • Stepped premiums. Your premiums start low, but increase as you get older.
  • Level premiums. Your premiums start out at a medium level, but they will stay the same over the course of the policy.
  • Hybrid premiums. This isa combination of the above. Your premiums start medium-low but rise over the course of your policy until they end up medium-high.

4. Duty of disclosure

The duty of disclosure refers to the things you have a legal duty to disclose to the insurer as opposed to the things they need to find out for themselves. This is the information insurers need so they can apply it to their underwriting process.

You must tell the insurer about anything that could reasonably be assumed to raise the risk they take in offering you life insurance. This can include the following:

  • If you have any pre-existing health conditions or symptoms which indicate a health issue.
  • If you know of something which will affect your income or your ability to pay premiums.
  • If you have any risky pastimes, such as playing rugby or other high-intensity sports.
  • If you have a dangerous job.
  • If you have seen a doctor in the past for any health issues.

Generally, the life insurance application form will have a questionnaire to catch most of these. If you fill it out honestly, you won’t need to worry about accidentally breaching your duty of disclosure.

5. Pre-existing conditions

You need to tell your insurer about pre-existing health conditions so they can run it through their underwriting process and adjust the terms of your policy accordingly. This is part of your duty of disclosure.

Pre-existing conditions refers to conditions before you either take out a policy or increase the level of cover in your policy.

If you do not tell insurers about your pre-existing conditions, then they can reject any claim related to that condition.

  • If the condition occurred before taking out a new policy, then they might pay nothing at all.
  • If the claim was before increasing the level of cover in your policy, then they might only pay the earlier, lower payout according to the previous terms of your policy.

6. Exclusions

Exclusions are conditions where the life insurance policy will not pay out. These will be different depending on which insurer you’re looking at, and what type of cover you’re looking at.

Pre-existing conditions are an exclusion. You will not be able to make a claim for a pre-existing condition unless you follow the appropriate steps.

Combined life insurance policies can roll together several kinds of cover into one. Each type of cover will have its own exclusions.

7. Beneficiary

When you take out a policy, you must choose your beneficiaries. These are the people who will get your life insurance payout if you die. If you have more than one beneficiary, the money will usually be divided evenly between them, but you can sometimes make requests that it be divided up in a specific way.

8. Expiry age

Life insurance policies usually have an age limit known as the expiry age. When you reach this age limit, your policy is over and you cannot make any future claims. There are no refunds for unused portions of your sum insured or premiums paid.

Key points to understand

  • The exact time of expiry is the 12-month anniversary after the expiry age listed in the policy. So if a policy says the expiry age is 80 years old, you are able to make claims for any events that occur until the exact moment you turn 81.
  • You can still make claims after the expiry age if it’s for something that happened before the expiry age.

The expiry age for most life insurance policies is 99 years old, but it may be lower for policies held through superannuation funds.

9. Premium freeze

Premium freeze is an option that is only available with stepped premiums. This lets you fix your premiums at a specific level. They will not get higher or lower until you choose to unfreeze them.

The downside is that your sum insured will gradually decrease over time, as long as your premiums are frozen, to whatever they would be if you were paying the frozen premiums as normal, stepped premiums.

10. Final expenses

A final expenses plan is a type of life insurance policy with a relatively low amount of cover that pays for the cost of funeral arrangements, administrative costs and other death expenses. Cover amounts are generally from around $15,000 to $60,000.

Unlike the more common, and thorough, combined life insurance policies, these have the following options:

  • They pay out when you reach the age limit of the policy as long as your premiums are up to date.
  • They pay out when a policyholder dies.

Funeral insurance does not replace life insurance and cannot provide for children, partners or family the way standard life insurance policies can. Instead, it’s a relatively small amount of money designed to help in the short term after a policyholder passes away.

Full life insurance policies can also include similar benefits, often in the form of a funeral advance. This will pay out a certain amount, also around $15,000, as a lump sum to help pay the immediate costs of a funeral and other immediate expenses.

11. Cooling off period

The cooling off period is a legal requirement of insurance policies sold by registered providers in Australia. This gives you a couple of weeks to consider whether a policy is suitable for you.

  • You can cancel a policy within the cooling off period to get a full refund of any premiums paid, minus nominal administrative and other fees.
  • The cooling off period can vary between insurers and policy types. It’s generally at least 14 days, but can sometimes exceed 30 days.

Within the cooling off period, you can also make adjustments to your policy that may be outside the normal scope of changes you can make without penalty. For example, there might normally be a fee if you want to increase or decrease your sum insured, but within the cooling off period you can do it for free.

A new cooling off period will often apply after you change your level of cover, and you may choose to roll back those changes free of charge and without issue during that period.

12. Terminal illness

In life insurance policies, the terminal illness benefit means your insurer will pay you the full sum insured while you are still alive if you have been diagnosed with a terminal illness.

Insurance policies will usually define a terminal illness as when a doctor has given you less than 12 months to live, regardless of any treatment you might receive.

In order to claim the terminal illness benefit, you will need to provide medical evidence and the insurer needs to agree with that medical evidence.

13. Limitations

Limitations can refer to any conditions which impact the situations in which a policy will pay out as well as the amount of the payout. It is a broad term and can often refer to many different situations that may result in a partial payout or affect your cover.

Limits on combined policies

One of the most important limits to be aware of is the reduction of cover that comes from previous claims on a combined life insurance policy. When you make a claim for any type of cover, such as a trauma insurance claim, your life insurance sum insured will be decreased accordingly. For example, if you have a $1 million life cover sum insured and make a $400,000 trauma claim on the same policy, you will now only have $600,000 sum insured.

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