Find out what types of life insurance are available in Australia and the benefits of taking out each.
Choosing a life insurance policy can be confusing and downright daunting. The term “life insurance” can actually be used to refer to a wide range of different policies, each of which provides unique cover and benefits, so it can be difficult to decipher the technical jargon and get the right policy for you.
Five types of life insurance and how they work
| Type | Payment type: | Main purpose | Entry age (Next birthday |
|---|---|---|---|
| Life cover | Lump sum | Pays out to loved ones in the event of your death | 18 - 79 |
| Income Protection | Ongoing monthly benefit of up to 85% of regular income | Keep up with your expenses if you are forced to take some time out of work due to accident, illness or major trauma | 18 - 64 |
| Trauma | Lump sum | Pays out if you're diagnosed with specific illness e.g. stroke so that you can focus on your recovery | 18 - 64 |
| TPD | Lump sum | Payment to clear debts, cover medical costs if you become permanently disabled | 18 - 64 |
| Funeral Insurance | Lump sum | Cover the cost of your funeral (up to $30,000) | 18 - 79 |
| Accidental injury / death | Lump sum or income protection | Provides cover in the event of accidental injury /death (no sickness cover) | 18 - 64 |
Click below to find out the purpose of each type of life insurance
Term life insurance
What is it?
Term life insurance provides a lump sum payment when you die or are diagnosed with a terminal illness during the term of the policy. You can choose the sum insured (up to a limit imposed by the insurer) for your policy, remembering that the premiums will rise along with your level of cover,.
You have the freedom to nominate the beneficiaries who will receive the life insurance payout and use this type of cover to provide financial support for your loved ones when you’re no longer around.
Term life insurance is sometimes also referred to as life cover or death cover.
Why would I consider this type of cover?
There are several situations when purchasing a term life insurance policy can be extremely beneficial, such as:
- If you have financial dependants who rely on you, for example your children or spouse
- If you have a mortgage or other significant debts
- If you want to be able to leave something behind for your family when you die
What does it cover?
A term life insurance benefit payment can be used to:
- Replace your lost income
- Repay your mortgage and other debts
- Help your family meet ongoing expenses
- Pay for the cost of your funeral
- Ensure that your loved ones can maintain their current standard of living should you pass away unexpectedly
Exclusions to be aware of
Most term life insurance policies will not provide any cover if your claim is a result of:
Total and permanent disablement (TPD) insurance
What is it?
TPD insurance provides a lump sum payment if you suffer a serious illness or injury that leads to total and permanent disablement. In order for a claim to be paid, you will need to be unable to be likely to ever return to work again.
Why would I consider this type of cover?
TPD insurance can be used to provide crucial financial security if you suffer an illness or injury and are unable to work again. If you have dependants, outstanding debts or other financial obligations, or if your financial standing relies on your ability to earn an income, TPD insurance is well worth considering.
A TPD benefit payment can be used to:
- Cover medical expenses and pay for your rehabilitation
- Pay for the cost of home modifications
- Repay the mortgage and other debts
- Reduce the impact of the loss of your income
- Help you and your loved ones manage other ongoing expenses
Exclusions to be aware of
Your TPD insurance claim will typically not be paid if:
Trauma insurance
What is it?
Trauma insurance is designed to provide cover when you suffer from a serious illness or health condition. When you experienced a specified trauma event, for example heart attack, cancer or stroke, trauma insurance provides a lump sum benefit. This type of cover is sometimes also referred to as critical illness insurance.
Why would I consider this type of cover?
Trauma insurance provides financial protection for you and your loved ones in the event that your life is turned upside down by serious illness. The benefit you receive can be used to:
- Cover your medical and rehabilitation costs
- Help a loved one take time off work to act as a carer
- Replace lost income
- Help you repay debts and meet other ongoing expenses
- Take a holiday/more time off work to help you recover
Exclusions to be aware of
There are certain circumstances under which a trauma insurance claim will not be paid, such as if:
Income protection insurance
What is it?
Income protection insurance pays an ongoing monthly benefit to replace your income when you are ill or injured and unable to work. Most policies will replace up to 75% of your regular income and may also offer cover for involuntary unemployment.
You also have the freedom to choose:
- The waiting period. This is the amount of time between when you suffer your illness or injury and when you start receiving benefits.
- The benefit period. This is the maximum length of time for which your policy will pay an ongoing benefit.
Why would I consider this type of cover?
Income protection insurance is an important consideration for many sole traders and small business owners, including tradies and basically anyone whose business relies on their ability to work in order to continue functioning. It’s also a worthwhile investment if the income you earn is crucial to your ability to pay the rent or mortgage and meet other ongoing expenses.
Income protection benefits can be used to:
- Replace your income
- Pay the mortgage/rent and help you repay other debts
- Provide for your family and cover other ongoing expenses
- Eliminate money worries so that you can concentrate on your recovery
Exclusions to be aware of
Your income protection insurance claim will not be paid if:
- It is caused by an intentional self-inflicted act
- You work in specific high-risk occupations, for example at heights above 15 metres or in an underground mine
- Your claim arises due to the use of alcohol or drugs
- It is caused by any mental illness
- It arises due to medically uncomplicated childbirth or pregnancy
Personal accident insurance
What is it?
Personal accident insurance, which is sometimes also referred to as accidental injury insurance, provides a lump sum payment when you are injured as a result of an accident. It covers injuries such as dislocations, fractures, severe burns and loss of sight or limbs, with different benefits payable depending on the type of injury.
It’s worth noting that personal accident insurance should not be confused with income protection insurance, which pays a monthly benefit when you are unable to work due to injury or illness.
Why would I consider this type of cover?
Personal accident insurance is designed to provide a financial safety net to help you deal with unexpected injuries. Accidents can happen at any time and this type of cover can help you take time off work to recover, pay medical bills and rehab costs, and generally meet ongoing expenses until you get back to full fitness.
Exclusions to be aware of
Personal accident insurance claims will not be paid if:
Funeral insurance
What is it?
Funeral insurance provides a lump sum payment to your loved ones or beneficiaries when you pass away. This benefit can be used to cover the cost of your funeral and meet any other immediate expenses that may arise.
It’s quick and easy to apply for funeral insurance cover, with no medical tests required and guaranteed acceptance usually provided to applicants under 70 years of age.
Why would I consider this type of cover?
Your death could place an unexpected financial burden on your loved ones, so taking out funeral cover will ensure that they have the financial support they need. This means they will not have to worry about money during this time of emotional stress and can instead focus on giving you a proper farewell.
Exclusions to be aware of
Your funeral insurance claim will not be paid if:
Business expenses insurance
What is it?
Business expenses insurance provides an ongoing monthly benefit to help keep your business running when you suffer an illness or injury. You can use the benefits you receive to cover business overheads such as staff salaries, loan repayments, rental payments for your business premises and phone and utility bills.
Why would I consider this type of cover?
If you’re a sole trader or small business owner and your business relies heavily on your ability to work in order to survive, business expenses insurance is well worth considering. The costs of running a business don’t simply disappear while you’re sick or injured, so having this type of cover allows you to ensure that your business doesn’t get into financial trouble while you’re out of action.
Exclusions to be aware of
Business expenses insurance will not cover:
Key person insurance
What is it?
Key person insurance, sometimes also referred to as key man insurance, is a type of life insurance policy taken out on a key person in a business, such as a director, sales manager or business owner. It provides a lump sum benefit when the life insured dies or is unable to work due to illness and injury, allowing you to cover the cost of finding and training a replacement, settling outstanding loans and ensuring a smooth transition of ownership.
There are two purposes for which you can use the benefits of key person insurance:
- For revenue purposes. You can use the benefit to improve or support the revenue-generating capacity of a business, for example if you use the policy to cover the cost of finding, recruiting and training a replacement employee.
- For capital purposes. Examples of the benefit payment being used for capital purposes include repaying debts called in after the loss of a key person, and to replace the lost profit the key person would have generated.
Why would I consider this type of cover?
If the ability of your business to turn a profit would be severely impacted by the loss of a key person, this type of cover is definitely worth a look. It allows you to protect your business against the impact of death or disability of your most important staff members and directors.
Exclusions to be aware of
Key person insurance will not provide cover in a range of circumstances, including:
- Claims arising due to intentional self-inflicted acts
- Suicide claims within the first 13 months of cover
- Other common exclusions that apply to life and TPD cover
How is each cover type treated when it comes to tax?
| Are premiums tax deductible? | Will I need to pay income tax on any benefits I receive? | |
|---|---|---|
| Term life insurance |
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| TPD insurance |
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| Trauma insurance |
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| Income protection insurance |
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| Personal accident insurance |
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| Funeral insurance |
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| Business expenses insurance |
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| Key person insurance |
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I already have life insurance – why should I consider income protection or TPD etc?
If you already have term life insurance in place, you might think you already have enough cover for yourself and your loved ones. However, it’s worth closely examining your financial obligations, as well as the impact an unexpected illness or injury could have on your financial position, before deciding whether life cover on its own is sufficient.
For example, if you were in a car accident and became totally and permanently disabled, you would not be eligible for a death benefit from your life insurance policy. However, you could have significant medical bills, rehabilitation expenses and home modification costs – and all while you may no longer be able to earn an income. But if you had TPD insurance as well as term life insurance, you would receive the financial support you need.
Similarly, would you be able to keep paying the mortgage and providing for your family if you were laid up due to injury or illness and unable to work? Without income protection insurance in place, you and your family could end up in serious financial difficulty.
With this in mind, it’s vital to consider a range of life insurance covers to make sure you have a sufficient level of protection in place.
Can I combine cover?
While you can opt to keep your different life insurance policies separate if you wish, many insurers allow you to bundle different types of cover together. For example, term life insurance can be paired with TPD cover and trauma insurance, while if you’re a sole trader or small business owner, you may want to consider adding business expenses insurance to your income protection cover.
Combining cover can make it much easier to manage your life insurance, as you only have one policy and one premium payment to manage rather than several. It can also lead to significant savings, with most insurers offering sizable premium discounts to customers who bundle cover.
How to choose a policy
With so many different types of life insurance available, choosing the right cover (or combination of covers) can be difficult. Before you purchase any sort of insurance, take the time to consider your cover needs, including your financial obligations and the level of financial support your loved ones might require in a time of need.
Next, start shopping around for the right cover. Compare policies and quotes from multiple insurers, paying special attention to the benefits and exclusions each insurer offers. Look past the cost of cover to the features on offer to find the best value for money.
Finally, don’t be afraid to ask for help if you need it. An experienced financial planner can help you work out what type of cover you need and how much cover you require, and then help you choose the right policy.
