The Different Types of Life Insurance

Think you may need life insurance but not sure what to look for? Find out what types are available in Australia.

There are essentially 4 core types of life insurance insurances available in Australia. These are:

Term Life Insurance

Term life insurance provides protection in two ways:

  1. It will pay you the sum-insured as a lump
  2. It will pay your beneficiaries the same insured amount if you were to pass away before the end of the policy term

The proceeds of the claim can be used to:

  • Cover the costs of bringing up children such as education and clothing etc.
  • Clear all debts so that the family is debt free as well as pay the funeral costs.

The main benefits obtained with term life insurance include:

  • Death and terminal illness benefit.
  • Funeral money advancement while your family is waiting to have the total amount of proceeds cleared.
  • Disability cover can also be attached along with living insurance benefits.
  • As it is term insurance it will need to be renewed when the term expires and this renewable aspect is guaranteed.
  • Any future benefit you may want to have included including business events is also guaranteed.
  • Inflation protection is included meaning that the pay out will always represent the real value of the cover which complements the included financial planning benefit.
  • You are able to nominate whoever you want as being beneficiaries.
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Total and Permanent Disablement (TPD) insurance.

TPD insurance is designed to prevent you and your dependants falling into financial ruin should you are unable to work again following permanent disablement. The lump sum benefit paid can help cover your cost of living expenses, the payment of your outstanding debts and any rehabilitation costs. It can be obtained as a stand alone policy or be made additional to a term insurance policy

TPD benefits are not normally paid until the disability you're suffering from has affected your way of living for a six month period, or your insurer decides beforehand that you're unlikely to ever work again. There are generally two definitions of disability to choose from:

  • Your own occupation means you specialise in some particular field and can no longer take part in this occupation ever again even though you may be capable of carrying out different duties for which you've never been previously trained.
  • Any occupation means that the illness or injury you're suffering from prevents you from carrying out any type of work whatsoever.

Premiums are based on your age, your gender and your lifestyle habits, especially whether or not you smoke. Your occupation is also an important factor in that if you're a manual worker you'll have to pay a higher premium than an office worker for the same amount of cover. It's also worth noting that different tax rules apply to TPD insurance premiums depending on whether the policy is held inside or outside superannuation.

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Trauma Insurance

Trauma insurance provides a lump sum payment for serious medical conditions you may suffer such as stroke, cancer or heart attack. The full list of medical conditions differs with different policies. This cover can also be obtained as a stand alone policy or be attached to a term life insurance policy.

Trauma insurance is often referred to as living insurance, as well as critical illness insurance, as you benefit from having the cover while you remain alive as opposed to term life insurance where the benefits are paid to your beneficiaries after you die.

Trauma insurance is intended to make sufficient money available if you suffer from a specific traumatic event to enable you to do the following:

  • Avoid any financial stress adding to your physical difficulties by paying any credit card debts, car loan and even mortgages
  • Cover the cost involved in any renovations to your home to better suit your changed lifestyle
  • Pay for any specialist medical care or any necessary rehabilitation.

Although most trauma insurance policies are similar no matter which insurer you're doing business with, some conditions may differ slightly, therefore it’s in your own interest to examine the policy thoroughly before you accept the cover. Most insurers cover you for between forty and fifty specific medical conditions and all cover you for the most common ailments such as cancer, heart attacks and stroke. This cover can also be obtained as a stand alone policy or be attached to a term life insurance policy.

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Income Protection insurance

Income protection insurance provides an ongoing benefit payment of up to 75% of your regular income if you are forced to take time off of work due to a serious injury or illness. Additional benefits may be included to cover your rehabilitation expenses.

Some key factors to consider when looking at policies include:

  • There is a waiting period involved before benefits start being paid. You can use this waiting period to your benefit in that you can have it finish when your employers sick pay ceases or when your savings are depleted enough. It's usual for people to wait for two weeks, a month or three months depending on their particular situation.
  • You're able to vary the length of time you want the benefits paid. This could be anything from two years to age 60 or 65.
  • You can have the benefit payments increase in line with inflation. This is an important factor as what might be sufficient today could well be insufficient in five, ten or twenty years time. This is known as a claims escalation option.
  • A day one accident benefit option is available if you take out a policy with a waiting period of 14 or 30 days. This means benefits will begin immediately and you'll receive the money as back pay when your waiting period has expired.
  • The business expense benefit option can also be included if you feel its needed. This is especially provided for self employed people and it's intended to pay all your fixed business expenses such as rent, phone, power etc. while you are unable to attend work in the normal fashion due to your illness or injury.
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How much life insurance do I actually need?

So how do you calculate how much insurance you really need? The answer lies when you assess whether you really need the extra coverage or different policies after you project your life insurance needs on these four factors.

  1. Final Expenses

Final expenses refer to the expenses related during funeral and burial which could amount up to $20,000. Your beneficiaries may be able to acquire the tax-free benefits from your insurance than from your estate.

  1. Debts and Mortgages

Sum up all the debts and mortgages that could become a big burden to your family when you die. Having this considered will allow your family the option of not being forced to sell any property.

  1. Education Expenses

This might be a little difficult since determining how much it will cost your kids to go to college could be quite tricky. But statistics have shown that college costs are rising by 5% every year, the same rate life insurance proceeds are expected to grow over time.

  1. Income Replacement

After covering all three, your loved ones will not have the need to replace 100% of your income.

Factors that may influence the level of cover you take out

Determining how much life insurance you need does not end there. There are some situations where additional cover is needed.

  • Marriage. If you are married, there is still some possibility that your spouse will still depend on you even if they are earning.
  • Children. From the time your kids are born and until they got to college, it takes a lot of money to raise children. So imagine if you are not around anymore and your spouse takes the burden in providing for and raising them.
  • Buying a house. Your house is one of the most important things you could leave to your family when you die. Therefore, it is important that you have it protected against any loss should tragedy strike suddenly.
  • Retirement. When you retire, it means that you are no longer covered by insurance work. This could be a big problem when you die since your wife could lose pension and some Social Security income.

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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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Richard Laycock

Richard is the senior insurance writer at finder.com.au and is on a mission to make insurance easier to understand.

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